Focus on Energy, 2010 - Karanovic & Nikolic

CONTENTSINTRODUCTION .............................................................................. 2INTRODUCTION TO SOUTH EAST EUROPEANREGIONAL ENERGY COMMUNITY TREATY ...................... 3THE ATHENS FORUM ..................................................................... 3ENERGY COMMUNITY TREATY .................................................... 4Institutions and Decision Making Bodies under the Treaty ..... 6FINANCING THE ENERGY COMMUNITY ................................... 8ROAD MAPS ...................................................................................... 8Bosnia and Herzegovina .................................................................. 9Macedonia........................................................................................ 10Montenegro ......................................................................................11Serbia .................................................................................................11Kosovo .............................................................................................. 12OVERVIEW OF ACQUIS COMMUNNAUTAIRETO BE IMPLEMENTED................................................................ 13The Acquis Communnautaire on Energy.................................... 13The Acquis Communnautaire on Environment ........................ 14The Acquis Communnautaire on Competition ..........................15The Acquis Communnautaire on Renewables ...........................15SERBIA............................................................................................. 16SERBIAN ENERGY POLICY ............................................................17SERBIAN ENERGY SECTOR – OVERVIEW ..................................17Introduction ......................................................................................17Electric Power Subsector ............................................................... 18Natural Gas Subsector ..................................................................20Oil Subsector ....................................................................................21Coal Subsector ................................................................................ 22District Heating System ................................................................23Industrial Energy System ..............................................................23Renewable Energy ..........................................................................23PARTICIPANTS IN THE ENERGY SECTOR .................................24Introduction .....................................................................................24Regulatory Bodies ...........................................................................24Public Enterprises............................................................................26Private Sector .................................................................................. 27REGULATORY FRAMEWORK .......................................................29Sources of Law ................................................................................29Energy Prices ....................................................................................29Qualified buyers ..............................................................................29Renewable Energy ..........................................................................30HOW TO BUILD A POWER PLANT IN SERBIANEWS ARTICLE ...............................................................................32KOSOVO ........................................................................................34INTRODUCTION ............................................................................34REGULATORY FRAMEWORK .......................................................34Basic Energy Legislation ................................................................34Energy Strategy ...............................................................................35Oil & Gas ..........................................................................................35Renewable Energy .......................................................................... 37PARTICIPANTS IN THE ENERGY SECTOR .................................38PROJECTS .........................................................................................39MACEDONIA ................................................................................ 41ENERGY SECTOR OVERVIEW ..................................................... 41Introduction ..................................................................................... 41Electric Power .................................................................................. 41Natural Gas .....................................................................................45Oil ......................................................................................................45Coal ...................................................................................................46District Heating System ................................................................46Renewable Energy ..........................................................................47Nuclear Energy ................................................................................47PARTICIPANTS IN THE ENERGY SECTOR .................................48Regulatory Bodies ...........................................................................48Public Enterprises............................................................................49Private Shareholders ......................................................................50REGULATORY FRAMEWORK .......................................................50The Umbrella Law ...........................................................................50Licenses ..............................................................................................51Construction of Energy Facilities ..................................................51Oil and Gas ...................................................................................... 52Renewable Energy ..........................................................................53Energy Trade ....................................................................................54HOW TO BUILD A POWER PLANT IN MACEDONIANEWS ARTICLE ............................................................................... 55BOSNIA AND HERZEGOVINA ...............................................56BIH ENERGY SECTOR OVERVIEW ..............................................56Introduction .....................................................................................56Electric Power .................................................................................. 57Natural Gas .....................................................................................58Oil ......................................................................................................59Coal ...................................................................................................60Renewable Energy ..........................................................................60PARTICIPANTS IN THE ENERGY SECTOR .................................60State Level........................................................................................60Entity’s Level ....................................................................................62Regulatory Bodies ...........................................................................62Public Enterprises............................................................................64Private Sector ..................................................................................64REGULATORY FRAMEWORK .......................................................65Electric Energy .................................................................................65Gas .....................................................................................................65Oil ......................................................................................................66HOW TO BUILD A POWER PLANT INBOSNIA AND HERZEGOVINANEWS ARTICLE ...............................................................................67MONTENEGRO ............................................................................68MONTENEGRIN ENERGY SECTOR – OVERVIEW ...................69Electric Energy Subsector ..............................................................69Coal Subsector ................................................................................69Oil and Gas ......................................................................................70District Heating System ................................................................70Renewable Energy Sources ...........................................................70PROJECTS IN THE ENERGY SECTOR ..........................................71Hydro Energy Projects ....................................................................71Coal and TPP Projects .................................................................... 72Wind Energy .................................................................................... 73Agreement between Montenegro and Italy .............................. 73Future Projects ................................................................................ 73PARTICIPANTS IN THE ENERGY SECTOR .................................74Regulatory Bodies ...........................................................................74Public Enterprises............................................................................ 75Private Sector .................................................................................. 75MONTENEGRIN ENERGY POLICY ............................................. 76REGULATORY FRAMEWORK ....................................................... 77Introduction – Energy Law ............................................................ 77Energy Prices .................................................................................... 77Renewable Energy .......................................................................... 77HOW TO BUILD A POWER PLANT IN MONTENEGRONEWS ARTICLE ...............................................................................80

INTRODUCTIONThe jurisdictions covered in this Book – Serbia, Kosovo, Bosnia and Herzegovina, Macedonia and Montenegrowere all part of the former Yugoslavia, which broke up in the early 1990’s. These countries have acombined population of approximately 16.5 million and a total GDP of EUR 103 billion (PPP).The region suffered a much documented and traumatic transition from a planned economy to series offree market economies. Today, these Western Balkan countries are potentially the next bloc of nationsto join the European Union. The entire region is eager to integrate into the north-Atlantic structures andis already harmonizing its legislation and economic structures with those of the EU.2Energy consumption in the region is much higher in comparison with EU member states. Energy productionon the other hand is quite low, with most power plants still utilizing technology that dates fromthe middle of the last century, which ultimately has an impact on the surrounding environment. Transmissionsystems are seriously underdeveloped and the energy trade market is yet to be liberalized. Thepotential for the development and use of renewable energy resources is huge. All of these countries havecapacity to harness and exploit water, wind, sun, biomass and geothermal energy for the production ofenergy and heat.FOCUS ON ENERGYWe believe that the region as a whole should experience a surge in energy investments before long as aresult of the efforts of various governments to attract investors in the energy sector through the implementationof various incentives.The region’s thirst for energy needs to be satisfied as soon as possible, and the incentives and opportunitiesfor investment in the energy sector have never been better.ABOUT THE AUTHORSKaranovic & Nikolic is a dynamic law firm and focuses on international commercial law. The firm representsleading investors entering the market in Serbia, Montenegro, Bosnia & Herzegovina and Macedonia.Drawing on both the local and international training and experience of its lawyers in the areas of civiland common law, Karanovic & Nikolic provides its clients with unparalleled professional services of thehighest possible standard. Ranked by both the Legal 500 and Chambers Global as the leading law firm inthe region, we are proud to serve our clients in their business endeavours in these markets.Founded in 1995 in Belgrade, Serbia, KN Karanovic & Nikolic today has 11 partners and 70 lawyers andis the only truly regional law firm present in this part of the world. KN Karanovic & Nikolic providesservices from its offices in Serbia (Belgrade), Bosnia and Herzegovina (Banja Luka and Sarajevo), Macedonia(Skopje) and Montenegro (Podgorica). Our team is divided departmentally into groups of lawyersspecialized in certain areas of law.One of these groups is the KN Energy & Infrastructure Team. This is a group of leading legal practitionersthat have a passion for this industry sector and who are well versed in applying the law in aprudent but progressively commercial manner to ensure the best possible outcome for their clients. Wemerge the multi jurisdictional skills and experience of our corporate and specialized industry advisorsand provide a professional, complete and cost effective service.

INTRODUCTION TO SOUTH EASTEUROPEAN REGIONAL ENERGYCOMMUNITY TREATYThe badly damaged energy infrastructure from the Yugoslav conflicts of the 1990s was one of the factorsthat helped contribute to the breakdown of a once integrated energy system that stretched all theway from the Adriatic to the Aegean Seas. The latest stage of the EU expansion process to the SouthEast Balkans coupled with the ever-increasing need to find an alternative source to the Russian Federationfor energy supplies to Western Europe (from Turkey and beyond) highlight the ever increasingnecessity to improve regional co-operation amongst South East European states. Such co-operationis also important in order to further consolidate and advance peace, democracy, stability, economicprosperity and growth in the region. Furthermore, it is becoming ever clearer that a regional approach toenergy security offers significant advantages both in terms of the improved utilization of existing energysupplies and production capacities as well as optimizing future investments 1 .3Based on the above logic, commentators agreed that the South East European (“SEE”) region needed aninstitutional and legal framework that would facilitate co-operation on rebuilding its energy networks.In addition it would ensure the stability required for investment seen as being contingent on the rule oflaw. It would also create the conditions where its economies could be rebuilt effectively, whilst at thesame time contributing to the security of energy supply in the wider European region.As a response to the above mentioned factors, the Energy Community of South East Europe (the ”EnergyCommunity”), has been established between the European Union (“EU”) and a number of SEE countriesin order to extend the EU internal energy market to the SEE region and beyond.THE ATHENS FORUMFOCUS ON ENERGYThe end of the twentieth century was marked by the evolvement of the European internal energy market.Parallel to this process, an idea to create an integrated regional market in SEE began to unfold. Consequently,in 2002, the European Commission established the SEE Electricity Regulation Forum. This socalled “Athens Forum” was established as a neutral and informal forum for the discussion and exchangeof experiences.The inaugural session of the Athens Forum took place in June 2002 and the conclusions of the intensediscussion that took place resulted in the Athens Memorandum of Understanding (the “Athens Memorandum”).The signing of the Athens Memorandum by the “adhering parties” (Albania, Bosnia and Herzegovina,Bulgaria, the Hellenic Republic (Greece), Romania, Turkey, the Federal Republic of Yugoslavia,the Former Yugoslav Republic of Macedonia (“Macedonia”) and the United Nations Interim AdministrationMission in Kosovo (“UNMIK”) (on behalf of Kosovo), whilst Croatia was to sign later as a “nonparticipatingsponsor”) and the “observers” (Austria, Hungary, Italy, Moldova, Slovenia) took place inNovember 2002.1 In 2005, the EU and World Bank estimated that EUR 12.5 billion will be required in the following 15 years (i.e. until 2020) to rehabilitate existingpower plants and to construct new ones. This is on top of the EUR 8.5 billion required for investments in the transmission and distribution of energyin the SEE.

The main goal of the Athens Forum was to establish an integrated regional electricity market in SEE by2005 and to ensure its integration into the EU internal market as defined in the Electricity Directive 2 .Such an integrated regional electricity market in SEE would be based on the principles set out in theElectricity Directive and any related legislation.In order to enable regional co-operation the adhering parties committed to establish compatible nationalelectricity market models through the setting up of independent electricity regulators and thelegal separation of different electricity functions, particularly the separation of both the transmissionand the distribution of energy from other functions.In 2003, the Athens Memorandum was revised to integrate the market in natural gas. In addition to theprovisions relating to the natural gas market, the paper included new EU Electricity and Gas Directivesfrom June 2003 3 .ENERGY COMMUNITY TREATYThe Athens Memorandum laid a foundation for further, more concrete steps to be taken. In May 2004,the EU opened negotiations with the countries of the SEE region in order to conclude an agreementwhich would collate all the previous political commitments which had been established in the AthensMemorandum into a legally binding document.4The negotiations took place with the EU on one side and Albania, Bosnia and Herzegovina, Bulgaria,Croatia, Macedonia, Montenegro, Serbia, Romania, Turkey and UNMIK on the other. The Energy CommunityTreaty (the “Treaty”) establishing the Energy Community was signed in Athens, Greece, on 25October 2005 and entered into force on 1 July 2006 4 . Initially, the Treaty covered the electricity and gassector and as of 11 December 2008 5 , the scope of the Treaty has been extended to the oil sector.FOCUS ON ENERGYThe Parties to the Treaty are the EU, on the one hand and the seven adhering parties (Albania, Bosniaand Herzegovina, Croatia, Macedonia, Montenegro, Serbia and UNMIK). Pursuant to the Treaty, the EUmember states may become participants in the Energy Community and be represented in its relevantbodies (the Ministerial Council, the Permanent High Level Group and the Regulatory Board). Neighbouringthird countries may be accepted as observers. The observers may also attend the meetings of theMinisterial Council, the Permanent High Level Group and the Regulatory Board, but unlike participants,they are not allowed to take part in the discussions.Since March 2008, 14 EU member states are classified as being participants (Austria, Bulgaria, Cyprus,Czech Republic, France, Germany, Greece, Hungary, Italy, the Netherlands, Romania, Slovakia, Sloveniaand the United Kingdom) (the “Participant States”). Both Romania and Bulgaria are former adheringparties which, following their accession to the European Union have since became participants. Georgia,Moldova, Norway, Turkey and Ukraine also take part as observers. Furthermore, international donors alsocontribute to the process (such as the European Bank for Reconstruction and Development (“EBRD”), theEuropean Investment Bank (“EIB”), the United States Agency for International Development (“USAID”),theEuropean Commission, the World Bank, the European Agency for Reconstruction (“EAR”), the Germanowned promotional bank “KfW Bankengruppe” and the Canadian International Development Agency(“CIDA”). The donors’ community is both chaired and coordinated by the European Commission.The Treaty provides a legal and economic framework for an integrated market in natural gas, electricityand oil based on the extension of the energy, environment and competition acquis communautaire to2 Directive 2003/54/EC (the ”Electricity Directive”)3 Directive 2003/55/EC (the “Gas Directive”)4 The Treaty was approved by the European Parliament on 29 May 2006 and subsequently ratified by UNMIK on 23 December 2005, Bulgaria on7 March 2006, Albania on 24 May 2006, the European Union and Macedonia on 29 May 2006, Romania on 26 June 2006, Croatia on 30 June 2006,Serbia on 27 July 2006, Bosnia and Herzegovina on 20 September 2006 and Montenegro on 15 December 20065 Pursuant to the decision of the Ministerial Council of the EU as of 11 December 2008 the acquis to be implemented by the adhering parties isextended so as to include the oil sector i.e. the supply, trade, processing and transmission of crude oil and petroleum products falling within the scopeof European Community Directive 2006/67/EC and the related pipe-lines, storage, refineries and import export facilities. The decision determines thenew elements of the acquis regarding oil sector and the timetable for its implementation must be defined by 30 June 2010.

the adhering parties, thus allowing for cross-border energy trade in the region and integration with theEU market and subsequently, an integrated market for other energy products and carriers such as liquefiednatural gas, petrol, hydrogen, or other essential network infrastructures.The Treaty states that the task of the Energy Community is to:continuous energy supply that is essential for economic development and social stability;gas networks, the generation of power and the transmission and distribution networks, so that allparties have access to a stable and continuous energy supply which is essential for economic developmentand social stability;extent of the product markets concerned.climate in which connections to the Caspian, North African and Middle East gas reserves can bedeveloped and whereby indigenous sources of energy such as natural gas, coal and hydropower canbe exploited.renewable energy sources (“RES”).miesof scale.In order to achieve the above objectives the Treaty establishes a three core activities which shall beundertaken by the Energy Community:5by the adhering parties. It is provided that the European Commission shall act as a coordinator ofthe aforementioned activities.ergymarket on the territory of the adhering parties and the EU member states involved (Austria,Bulgaria, Greece, Hungary, Italy, Romania and Slovenia). This shall include the creation of measuresto enable the long-distance transportation of energy, the security of supply, the provision of energyto citizens, the harmonisation of market models and the promotion of RES and energy efficiency.It is also to provide a safeguard in the event of a sudden energy market crisis involving an EnergyCommunity member.FOCUS ON ENERGYties,quantitative energy imports, export restrictions and any measures having an equivalent effect,are prohibited between the parties. Furthermore, the Treaty promotes solidarity between the partiesby prescribing mutual assistance in the event of a disruption of the energy supply. As a responseto the disruption, the Ministerial Council of Energy Community is authorized to take all necessarymeasures. The Energy Community may take measures in order to unify the trading policy of themembers of the EU with third party countries.

INSTITUTIONS AND DECISIONMAKING BODIES UNDER THE TREATYThe Treaty establishes the institutions and bodies of the Energy Community. These are the:MINISTERIAL COUNCILPERMANENT HIGH LEVEL GROUPREGULATORY BOARDATHENS FORUM SOCIAL FORUM GAS FORUM OIL FORUMSECRETARIAT6FOCUS ON ENERGYMinisterial CouncilThe Ministerial Council ensures that the objectives set out in the Treaty are achieved. It is the principaldecision making body of the Energy Community. In that respect it provides general policy guidelines,takes measures to meet the Treaty’s objectives and adopts procedural acts such as the allocation oftasks, powers or obligations. It is made up of one representative for each party to the Treaty and tworepresentatives of the EU. Also, one non-voting representative of each participant may participate in itsmeetings. The presidency of the Ministerial Council is held in turn by each party for a term of six monthsand is assisted by one representative of the European Union and one representative of the incomingpresidency. The Ministerial Council meets at least once every six months and the meetings are organisedby the Secretariat of the Energy Community (the “Secretariat”). It submits an annual report to theEuropean Parliament and to the parliaments of the adhering parties and the participants.Permanent High Level GroupThe key mission of the Permanent High Level Group is to prepare the work of the Ministerial Council. Italso gives assent to technical assistance requests made by donors and financial institutions, it reports tothe Ministerial Council on the progress of the objectives of the Treaty. It consists of one representativeof each party to the Treaty and two representatives from the EU. One non-voting representative of eachparticipant may participate in its meetings. Meetings of the Permanent High Level Group are convenedand chaired by the presidency and are organised by the Secretariat.Regulatory BoardThe Regulatory Board’s primary role is to advise the Ministerial Council and Permanent High Level Groupon statutory, technical and regulatory rules and to issue recommendations in the event of cross-borderdisputes between regulators. It is composed of one representative of the energy regulator from eachparty to the Treaty, with the EU being represented by the European Commission which is assisted by oneregulator from each of the Participant States, and one representative of the European Regulators Groupfor Electricity and Gas (“ERGEG”). The Regulatory Board meets in Athens.ForumsThe Forums have the task to advise the Energy Community and to provide a medium for open discussionand the voicing of ideas. The Forums are composed of representatives of all interested stakeholders,including industries, regulators, industry representative groups and consumers. Each Forum is chairedby a representative of the EU. The conclusions of the Forums are adopted by consensus and are forwardedto the Permanent High Level Group. The Treaty initially envisaged the existence of two Forums,the already existing Athens Forum and a “Gas Forum” which, for the first time, was hosted in Maribor,

Slovenia in 2007. In the same year, discussions on the possible establishment of a new Forum on socialissues were held between the parties to the Treaty which consequently lead to the adoption of the“Memorandum of Understanding on Social Issues” which envisaged the possibility of the establishmentof the “Social Forum”. The “Social Forum” considers the social impact of energy market reform. The first“Social Forum” took place in November 2008. At its December 2008 meeting, the Ministerial Councildecided to extend the scope of the Treaty on the oil sector and to establish an “Oil Forum”. Pursuant tothe aforementioned decision, the “Oil Forum” is to advise the Energy Community on issues related tothe oil sector. It is envisaged that “Oil Forum” will meet annually. The first “Oil Forum” was convened inSeptember 2009.The SecretariatThe Secretariat is based in Vienna and it provides amongst other things, administrative support to theother institutions of the Energy Community. It co-ordinates the donor activities and it monitors the properimplementation of Treaty obligations by the parties. It then submits yearly progress reports to the MinisterialCouncil and performs the day to day activities of the Energy Community. The Secretariat has a Directorthat is appointed by the Ministerial Council. The Director of the Secretariat or a nominated alternate assistsat the Ministerial Council, the Permanent High Level Group, the Regulatory Board and the Forums.Decision Making ProcessThe Energy Community takes measures in the form of decisions which are legally binding and recommendationswhich have no binding force. Measures relating to the application of the acquis communautairecan be taken by the Ministerial Council, the Permanent High Level Group or the RegulatoryBoard only upon a proposal of the European Commission. Measures related to the other core activities(such as the creation of a specific regulatory framework for an efficient regional energy market and thecreation of a single energy market) can be taken by the same bodies upon the proposal of a party to theTreaty including the Secretariat in the case of measures for the creation of the single energy market.The measures are adopted either by a simple majority (as is the case with the decisions relating to theapplication of acquis communautaire), or by a two-thirds majority (as is the case with the decisionsrelating to the creation of a specific regulatory framework for efficient regional energy market), or byunanimity (as is the case with the decisions relating to the creation of the single energy market). Internalaffairs, such as organizational, budgetary and transparency issues of the Energy Community areregulated by procedural acts.The parties to the Treaty are obliged to implement decisions adopted by the Ministerial Council, the PermanentHigh Level Group or the Regulatory Board (that are addressed to them) in their domestic legal system.A failure to comply with this obligation may be brought to the attention of the Ministerial Council byany party, the Secretariat or the Regulatory Board. Whether or not there has been a breach of obligationsof the parties is determined by the Ministerial Council. In the event of serious and persistent breaches bya party of its obligations, the Ministerial Council may, acting by unanimity, suspend certain rights grantedto the noncompliant party under the Treaty, including the suspension of voting rights and the offendingparty’s subsequent exclusion from meetings or other such mechanisms provided for in the Treaty.7FOCUS ON ENERGYIn practice, the above mechanism started to apply after the Rules of Procedure for Dispute Settlementunder the Energy Community Treaty (the “Dispute Rules”) had been adopted in June 2008 1 . From15 October 2009, the Secretariat has received five complaints out of which one was levelled againstSerbia, one against Bosnia and Herzegovina and three against Macedonia. It is worth mentioning thateach complaint has been initiated by private bodies. According to the aforementioned Dispute Rules,upon receiving a complaint, the Secretariat assesses the merits of a case and decides whether to initiatea formal procedure. If the respective country, as a reply to the complaint, harmonises its legislation andpractice so that it is in line with the Treaty and if that is satisfactory to both the complainant and to theSecretariat, then the case is closed without the initiating of a formal procedure. So far, the only formalprocedure initiated to date has been against Macedonia.1 Procedural Act No. 2008/01/MC-EnC dated 27 June 2008.

FINANCING THE ENERGY COMMUNITY8The functioning of the Energy Community is financed throughcontributions of the parties as set out by the Treaty (of whichmore than 98% of the monetary contributions originate fromthe EU as a whole). The level of contributions may be reviewedevery five years at the request of any party to the Treaty. TheDirector of the Secretariat implements the budget in accordancewith the procedural acts that regulate the budget and reports tothe Ministerial Council on the execution of the budget on an annualbasis. The Secretariat is also responsible for making sure thatall contributions are correctly spent and accounted for.The total budget for 2009was EUR 2,996,942. Accordingto preliminary financialreports some 90% to 95% ofthe budget was utilized forthe financing of the operationsof the Treaty.FOCUS ON ENERGYTo date, funding of the Energy Community institutions and itsactivities have been covered predominantly by the EU throughthe Community Assistance for Reconstruction, Development and Stabilisation funds (the “CARDS”)and later through the Instrument for Pre-Accession Assistance programme (the “IPA”) which replacedCARDS in 2007. The Austrian government gave a significant contribution by financing the interim EnergyCommunity Secretariat which was established as a non-profit organisation under the Austrian laws untilthe second half of 2007 when it finally became an international organization and a constituent body ofthe Energy Community.ROAD MAPSAs explained above in more detail, the Treaty provided the adhering parties with onerous targets. In orderto meet these targets to fulfil all legally binding obligations, the Energy Community has developeda series of road maps (the “Road Maps”).The Road Maps are structured to break down the compliance requirements into six separate chapterswhich are then further divided on more specified policy requirements:ketdesign market rules, licensing).The first chapter is the adaptation and implementation of the respective acquis communnautaire and itis the starting point for the compliance process. This chapter refers to the national legislation indicating

egulations and articles transposing the relevant acquis communnautaire. The chapter “Market structure”addresses market concentration and pursues the separation (unbundling) of system operators. Thethird chapter addresses the wholesale market and the market rules. The chapter entitled “Retail market”deals with retail market opening issues. The customer switching process, payment reform and customerprotection are being addressed as well by this chapter. The fifth chapter covers the issues of cost reflectivetariffs and affordability. Finally, the sixth chapter relates to cross border trade and cross bordertransport. As this chapter brings together measures needed for the establishment of a trans-nationalenergy market in the SEE region, relevant actions have to be agreed upon by regional bodies.In terms of a timeframe, the Road Maps comprise of 5 distinct stages, namely drafting, agreeing, committing,implementing and monitoring.For every single policy issue, the plan defines a required action, a deadline and an institution in chargewith respect to the actual needs and the compliance status of each party.9Pursuant to the Treaty, the Secretariat monitors the effective implementation of the treaty obligationsby each of the parties. It submits yearly progress reports to the Ministerial Council in the form of a “Reporton the Implementation of the acquis communautaire under the Treaty”.The latest Report on the Implementation of the acquis communautaire under the Treaty Establishingthe Energy Community 1 focuses on the main achievements and the outstanding problems regarding theimplementation of the Treaty in 2009. It indicates the key issues that need to be addressed in 2010 andbeyond. The main points of the Report are presented in the following paragraphs along with the nationalenergy strategy adopted by the respective country.FOCUS ON ENERGYBosnia and HerzegovinaAlthough Republika Srpska has adopted the Energy Law 2 and an amended Electricity Law 3 and the Federationof Bosnia and Herzegovina is preparing an Electricity Law 4 as well as a regulation concerningrenewable resources, the overall conclusion of the Secretariat in the Report is that the legal frameworkof both entities needs to be further upgraded.An act on gas has not been enacted yet, but according to the Report if a political agreement is achieved it couldbe developed and implemented relatively quickly. The Report identifies an insufficient administrative capacity;accordingly, the strengthening of human resources should be set as a priority. The European Council (“EC”)Directive concerning measures to safeguard security of natural gas supply 5 and the EC Regulation on conditionsfor access to the natural gas transmission networks 6 have not yet been implemented to a satisfactory level.1 Report on the Implementation of the acquis under the Treaty Establishing the Energy Community reflecting the status as of November 2009 („theReport“).2 The Law on Energy (“Official Gazette of the Republika Spska” No. 49/09 ).3 The Law on Electricity (“Official Gazette of the Republika Spska” Nos. 8/08 and 34/09).4 The Law on Electricity (“Official Gazette of the Federation of Bosnia and Herzegovina” Nos. 41/02, 38/05, 61/09).5 2004/67/EC of 26 April 2004.6 EC Regulation 1775/2005.

In 2009, an independent system operator was established as an entity responsible for overall electricitysystem operation. The process of unbundling the distribution has not yet been completed; nonethelessspecific activities in that direction are ongoing.The transposition of the EC Directive on the assessment of the effects of certain public and private projectson the environment 7 has been partially achieved through the passing of the Law on EnvironmentalProtection 8 however its full implementation still requires further legislation.Competition legislation is generally in line with EU regulations.As for renewable energy sources, on the entities level, some important steps have been made in respectto the implementation of the EU Directive on the promotion of electricity produced from renewableenergy sources in the internal electricity market 9 . First of all, a system of incentives has been adopted forelectricity generated from renewable sources. Also, electricity generation facilities which use renewablesources are paying 50% of the fixed part of the connection fees adopted by the country’s Energy RegulatoryCommission. Facilities using hydro power can use this benefit if their capacity does not exceed 10MW. Moreover, there are several renewable projects being developed in both entities and many moreare in the planning phase. Investment in new thermal power plants (“TPPs”) is underway as well asinvestment in the distribution networks.10Bosnia and Herzegovina does not have an energy strategy or policy adopted on a state level. Nevertheless,the Council of Ministers of Bosnia and Herzegovina issued a comprehensive “Medium-Term DevelopmentStrategy” in 2004. This determines its main objectives with regard to energy sector reform.Areas of emphasis include the attraction of investment, the security of supply, the improvement ofenergy efficiency, a liberalized and competitive market, environmental protection and an increase in theuse of renewable energy.FOCUS ON ENERGYMacedoniaAccording to the latest Report, new amendments to the Macedonian energy law 10 are currently beingprepared by the Ministry of Economy of Macedonia in order to increase the compliance with the energyacquis communnautaire and hopefully these will fill the existing gaps in the legislation. It is expectedthat the amendments will create the framework for real market opening and will enhance the powerof regulatory bodies. Transmission tariffs should be increased to ensure the viability of the Macedoniantransmission system operator 11 on medium and long-term period.Given that the Macedonian energy law covers all energy sectors in Macedonia, the gas market is under itsscope as well. Many crucial provisions of the EC Directive concerning common rules for the internal marketin natural gas and the previously mentioned EC Directive concerning measures to safeguard securityof natural gas supply are yet to be transposed through amendments to the Macedonian energy law.The EC Directive 1997/11/EC, referred to earlier, has been integrated into the national legal system forthe most part. Significant progress has been made regarding the implementation of competition lawprovisions but there are still shortcomings in the enforcement procedures.The regulatory framework to support renewable energy sources is well advanced but this is to be testedthrough practical implementation.The adoption of an energy strategy as laid out in the “Draft Strategy for the Development of Energy” 12is expected in the near future. This Draft Strategy provides for two scenarios for the development of the7 1997/11/EC of 27 June 1985.8 Law on Environmental Protection (“Official Gazette of the Federation of Bosnia and Herzegovina” No. 33/03).9 2001/77/EC of 27 September 2001.10 The Law on Energy (“Official Gazette of the Republic of Macedonia” No. 63/06),.11 Macedonian Transmission System Operator- „MEPSO a.d.“, Orce Nikolov b.b., Skopje.12 Draft Strategy for the Development of Energy presented on 16 June 2009 for the period 2008-2020 with vision until 2030, prepared by the MacedonianAcademy of Science and Arts (the “Draft Strategy”).

energy sector in Macedonia. One is with regard to the construction of a nuclear power plant; the other iswithout the construction of such a plant. The document envisages the modernization and revitalizationof the existing hydro and thermo energy infrastructure. It envisages the full use of both the hydro electricpotential as well as the full utilization of the states lignite or brown coal resources. The developmentof natural gas and RES are also emphasised. The Draft Strategy also envisages for energy market to beliberalized and to operate based on market prices.MontenegroIn 2009 Montenegro initiated the process of upgrading its energy legislation by drafting the new energylaw in tight cooperation with experts from the Secretariat. In general, the draft energy law presentssubstantial improvement and provides for the transposition of the core requirements of the energy acquiscommunnautaire. In July 2009, the Montenegrin transmission service operator 13 unbundled from“Elektoprivreda Crne Gore a.d.” and accordingly making the first step toward a competitive market. Inaddition, 17% of the state owned stake in “Elektoprivreda Crne Gore a.d.” was sold to an Italian basedcompany “A2A S.p.A”. Additional efforts have to be made in the areas of transmission and distributiontariffs because users do not have transparent tariffs yet.Although the gas market is underdeveloped, the gas sector has been integrated into the draft energylaw. The provisions of the EC Directive 2003/55/EC 14 and most of the provisions of the EC regulation1775/2005/EC 15 and partially EC Directive 2004/67/EC 16 have been transposed into the draft energy law.Secondary legislation shall be developed parallel to gas projects which may be realized in the future.Montenegrin environmental legislation is in general compliant with EC Directive 1997/11/EC 17 but furtherwork has to be done in respect of the environmental acquis communnautaire.11A new competition law is currently being drafted and is expected to be adopted in the course of this year.This law should remove the current shortcomings of the current Montenegrin law on the protection ofcompetition 18 , especially with regard to shortcomings surrounding the independence of the competitionauthority, the various competition procedures available to the commission and the issuing of fines foranti competitive actions.The revision of the domestic energy law also deals with biofuels and transposes other relevant provisionsof the EC Directive on the promotion of the use of biofuels or other renewable fuels for transport 19as well as the EC Directive 2001/77/EC 20 . It is important to note that the Montenegrin government hasinitiated the tender process for investment in wind and small hydro power plants.The “Energy Development Strategy of Montenegro” 21 , among other things, sets out the main strategiccommitments such as the improvement of energy efficiency in the areas of production and consumption,improvements to the security of supply along with the development and use of renewable energyresources. The development of hydro electric power and a reduction in the state’s energy dependencyare also emphasised.FOCUS ON ENERGYSerbiaThe draft amendments to the Serbian energy law 22 were submitted to the Secretariat for their commentsat the end of October 2009. These comments should help increase compliance related to transpositionof the electricity, gas, RES and security of supply related acquis communnautaire.It is expected that amendments to the Serbian energy law shall provide the framework for the real13 „Prenos a.d.“, Podgorica.14 Previously defined.15 Idem.16 Idem.17 Idem.18 The Law on Protection of Competition (“Official Gazette of the Montenegro” Nos. 69/2005 and 37/2007).19 2003/30/EC of 8 May 2003.20 Previously defined.21 The Energy Development Strategy of Montenegro dated December 2007, prepared by Montenegrin Ministry of Economy.22 The Law on Energy (“Official Gazette of the Republic of Serbia” No. 84/2004).

opening of the energy market. The existing regulated tariffs which are valid for all customers are notcost reflective and provide no incentive for customers to switch suppliers or for potential investors toenter Serbian electricity markets. The new electricity generation projects consisting of two lignite-basedthermal power plants and gas fired combined heat and power plant (“CHP”) are progressing. The investmentsin the new interconnections and in the transmission networks are progressing as planned.With regard to gas, some crucial provisions of the EC Directive 2003/55/EC 23 have not still been fullytransposed. The amendments to the Serbian energy law were supposed to transpose all of the missingprovisions of the gas related acquis communnautaire as was agreed in the Treaty establishing the EnergyCommunity. However, analyses of the draft amendments have shown that there are still crucial provisionsmissing with regard to the EC Directive 2003/55/EC and even more in respect to the EC Directive2004/67/EC and EC Regulative 1775/2005. 24Environmental legislation and the practical implementation of such legislation also requires further improvementsfor it to comply with the acquis communnautaire.With regard to competition legislation, 2009 brought significant progress. The new Serbian law on competition25 was adopted in November 2009. It has introduced more efficient procedures. Furthermore,the thresholds for merger controls are now higher. This provides the commission with more capacity topursue merger control, cartels and abuse of dominance cases.12The legal framework for promoting renewable energy sources has to advance further in order to attractinvestors to tap into the Serbia’s great renewables potential.The Energy Sector Development Strategy of the Republic of Serbia 26 highlights five key priorities:FOCUS ON ENERGYergyinstallations);within the domestic energy sectors, as well as within the frameworks of the existing regional infrastructuresystems.KosovoIn 2009 the three basic laws of the energy sector of Kosovo were brought back to the legislature forredrafting. The objective was the achievement of full compliance with the requirements of the Treaty.These Kosovo laws are the law on energy 27 , the law on electricity 28 and the law on the energy regulator 29 .These drafts were submitted to the Secretariat for comments on a number of occasions. Improvementsof some key elements are expected including the treatment of the regulatory authority the Energy RegulatoryOffice of Kosovo with respect to its powers, responsibilities and its financial and operationalcapacity. In addition it is hoped that this legislation will improve the functional structure of the marketenvironment, provide the conditions needed for the achievement of much needed security of electricitysupply, customer rights, customer protection and quality of service, the opening of the market to competitionand the monitoring of obligations.After the unbundling of the transmission system operator (“KOSTT”) in 2006, the “Kosovo EnergyCorporation” is currently undergoing further legal unbundling into two separate corporate structures – a23 Previously defined.24 Each previously defined.25 The Law on Competition (“Official Gazette of the Republic of Serbia” No. 51/2009).26 The Energy Sector Development Strategy of the Republic of Serbia dated May 2005.27 The Law on Energy No 2004/8, published in the „Official Gazette of Kosovo“ No. 22.28 The Law on Electricity No. 2004/10, published in the „Official Gazette of Kosovo“ No. 29.29 The Law on Energy Regulator No 2004/9, published in the „Official Gazette of Kosovo“ No. 22.

distribution system operator performing public supply activities and an electricity generation companywhich shall include lignite mining.UNMIK has transposed the requirements of the EC Directive 2003/55/EC 30 in the Kosovo law on gas 31which was promulgated on 12 November 2009. The transposition of EC Directive 2004/67/EC 32 and ECregulation 1775/2005 33 should be finalized in 2010 and will represent the legal framework for a transparent,non-discriminatory and competitive market environment and a sound basis for investments.The Kosovo law on environmental impact assessment 34 was adopted on 26 February 2009. This newlaw partially transposes EC Directive 1997/11/EC 35 and needs to be completed by secondary legislation.Drafts for such legislation are awaiting adoption. Full implementation is predicted by the end of 2010.With respect to competition law, the Kosovo law on competition 36 from 2004 still needs some improvementon substance, in particular with regard to the provisions concerning the abuse of dominant positions.The drafts of the Kosovon law on energy and law on electricity submitted to the Secretariat for commentsincluded the full transpositions of the EC Directive 2001/77/EC 37 . On the other hand, during 2009, there waslittle progress to be noted regarding the implementation of EC Directive 2003/30/EC 38 .The new energy strategy (2009–2018) was approved by the Kosovo government in November 2009. Thispaper provides that electricity generation investments have high priority and include projects for the constructionof the new lignite-fired TPP New Kosovo (in total – 1000 MW) planned for completion by 2016 andanother project concerning the exploitation of hydro capacities.13OVERVIEW OF ACQUISCOMMUNNAUTAIRE TO BE IMPLEMENTEDThe Acquis Communnautaire on EnergyEC Directive 2003/54/ECThis Directive sets out the rules for the internal market in electricity especially in terms of generation, transmission,distribution and supply of electricity. EU member states are obliged to implement appropriatemeasures to achieve social and economic cohesion, environmental protection and the security of supplywhich, inter alia, may include the provision of economic incentives. Criteria for granting authorization for theconstruction of new generating capacities is left to be further developed by each member state as describedin the Directive. Transmission system operators and the distribution system operator have to be unbundledso as to be independent in their legal form, organization and decision making. Member states have to ensurethat third party access to the transmission and distribution systems based on published tariffs is appliedobjectively and without discrimination between system users. This Directive further obliges member statesto establish a regulatory authority and allows them to apply safeguard measures in case of sudden crisis inenergy market.FOCUS ON ENERGYEC Directive 2003/55/ECThis EC Directive sets out the rules for the internal market in natural gas, transmission, distribution, supply andstorage of natural gas. The rules concerning an integrated market in natural gas are similar to the rules regulatingthe electricity market. Namely, in order to establish the internal market, the Directive lays down the rules30 Previously defined.31 The Law on Natural Gas No 03/-L-133, published in the „Official Gazette of Kosovo“ No. 22.32 Previously defined.33 Idem.34 A Law on Environmental Impact Assessment No 03/L-024, published in the „Official Gazette of Kosovo“ No. 50.35 Previously defined.36 The Law on Competition No 2004/36, published in the „Official Gazette of Kosovo“ No. 14.37 Previously defined.38 Idem.

14FOCUS ON ENERGYreferring to consumer protection, non-discriminatorythird party access to transmission and distributionsystems. It also refers to liquefied natural gas facilities,the unbundling of transmission and distributionfrom production and supply, the establishment ofindependent regulators, and safeguard measures inevent of a sudden crisis in energy market.EC Regulation 1228/2003/ECThis regulation sets out the rules on cross-border exchangesin electricity. In that respect it establishes acompensation mechanism for the cross border flowof electricity, the setting of harmonized principles oncross-border transmission charges and the allocationof available capacities for interconnections betweennational transmission systems. It also introducessome constraints on transmission charging policieswithin national systems.EC Directive 2004/67/ECThe 2004 Directive establishes non-discriminatorymeasures to ensure the security of natural gas supply.It emphasises security of natural gas supplies tohousehold customers. Within the framework establishedby this Directive, member states have todefine general, transparent and non-discriminatorysecurity of natural gas supply policies.EC Regulation 1775/2005/ECThe Regulation prescribes conditions for access tothe natural gas transmission networks. It includesharmonized principles for tariffs regarding access tothe network, the establishment of third party accessservices and harmonized principles for capacityallocation and congestion management, the determinationof transparency requirements, balancingrules, imbalance charges and the facilitating of energytrading capacities.EC Directive 2005/89/ECThis Directive regulates the security of electricitysupplies and infrastructure investments. Within theframework established by this Directive, memberstates have to define transparent, stable and nondiscriminatorypolicies with regard to the security ofelectricity supply.EC Directive 2006/67/ECAccording to this Directive, member states are requiredto build up and constantly maintain minimumstocks of petroleum products equal to at least90 days of the average daily internal consumptionduring the previous calendar year. The calculationof the daily internal consumption is based on dataconcerning motor and aviation fuel, gas oil, dieseloil, kerosene (and kerosene type jet-fuels), as well asfuel oils. This Directive also regulates further measureswhich are aimed at avoiding supply crises.EC Directive 2006/32/ECThis Directive promotes energy end-use efficiencyand applies to the distribution and retail sale of energy.Member states must ensure that the publicsector adopts measures to improve energy efficiency,inform the public and businesses of the measuresadopted and promote the exchange of good practices.These measures include the use of third-partyfinancing and energy performance contracts; thepurchase of energy-efficient equipment and vehiclesand the purchase of low-energy products. Memberstates must appoint one or more new or existing organizationsto carry out the administrative, managementand implementation duties in order to meettheir obligations arising under this Directive.EC Directive 2002/91/ECThe objective of this Directive is to promote theimprovement of the energy performance in buildings,taking into account outdoor climatic and localconditions, as well as indoor climate requirementsand cost-effectiveness. The key points of the Directiveare a common methodology for calculating theintegrated energy performance of buildings; the establishmentof minimum standards on the energyperformance of new buildings and existing buildingsthat are subject to major renovation; systems for theenergy certification of new and existing buildingsand for public buildings. The regular inspection ofboilers and central air-conditioning systems in buildingsand in addition an assessment of heating installationswhere the boilers are more than 15 years oldis also provided for under this Directive.EC Directive 92/75/ECThis Directive enacted in 1992, applies to varioushousehold appliances, providing that at the point ofsale, they must be accompanied by a label providinginformation relating to their energy consumption.The Acquis Communnautaireon EnvironmentEC Directive 2003/35/ECThis Directive implements obligations arisingunder the “Convention on the Access to Information,Public Participation in Decision-Makingand Access to Justice in Environmental Matters”(the “Århus Convention”) signed by the EU andthe UN/ECE. In that respect it provides for publicparticipation in respect of the drawing up of

certain plans and programs relating to the environment.EC Directive 2001/80/ECThe so called, “Large Combustion Plant Directive”determines the emission limits of air pollutantsfor plants which use combustible fuels to generateelectricity and/or heat and that have a maximumthermal input greater than 50 MW. The Directivesets different emission limits for new and existingplants. New plants are defined as those that are eitherlicensed before 27 November 2002 or put intooperation after 27 November 2003. This Directiveencourages the combined production of both heatand electricity (cogeneration).EC Directive 1999/32/ECThis Directive lays down the rules to reduce theemission of sulphur dioxide which is produced asa by-product in the process of the combustion ofcertain types of fuels (gas oils and heavy fuel oils).A reduction of sulphur dioxide emissions is to beachieved through the limitation of sulphur contentsin petroleum-derived liquid fuels.EC Directive 97/11/EC amending the EC Directive85/33/ECThis Directive regulates the assessment of the environmentaleffects of certain private and public projects.It envisages that prior to granting consent forthe construction of projects which could have significantimpact on the environment; the developerhas to make an environmental impact assessment.EC Directive 79/409/ECThis, so called “Bird Directive”, regulates the conservationof wild birds their nests, eggs and habitats.This Directive provides a framework for the conservationand management of, and human interactionswith, wild birds in Europe.The Acquis Communnautaire on CompetitionThe acquis communnautaire on competition comprisesthe main areas of EC competition law. Namely,Article 101 (formerly Article 81) concerning theprohibition of cartels, Article 102 (formerly Article82) referring to the prohibition of abuses of dominantpositions and Article 107 (formerly Article 87)regulating the prohibition of state aid. Additionally,Article 106 (1) and (2) (formerly Article 86) regulatingpublic undertakings and undertakings to whichspecial or exclusive rights are granted is also applicableto the adhering parties.The Acquis Communnautaire on RenewablesEC Directive 2001/77/ECThis Directive promotes electricity produced fromrenewable energy sources in the internal electricitymarket. Furthermore, this Directive defines the term‘renewable energy sources’ as wind, solar, geothermal,wave, tidal, hydroelectric, biomass, landfill gas,sewage treatment gas and biogas energies.EC Directive 2003/30/ECThis Directive sets out the rules regarding the use ofbiofuels and other renewable fuels in transportation.According to this Directive, biofuels are bioethanol,produced by the fermentation of plants rich in sugar;biodiesel, a diesel-quality fuel produced from biomassor used frying oils; ETBE, etherized bioethanol; biogas,a fuel gas produced by the fermentation of organicmatter by bacterial populations in the absence of oxygen;biomethanol, a methanol produced from biomass;and bio-oil, an oil fuel produced by pyrolysis.EC Directive 2009/28/ECThis Directive promotes the use of energy from renewablesources and shall subsequently repeal Directives2001/77 and 2003/30 39 . The deadline formember states to transpose this Directive into theirnational legislative is December 2010.39 Previously defined.15FOCUS ON ENERGY

SERBIASrbija/СрбијаBELGRADESerbia is a middle-income country with a populationof approx 8 million and has great potentialfor economic development. Belgrade is the capitalcity with over 2 million inhabitants. The Serbianenergy potential is predominantly in the hydrosector. Currently, Serbia is the most active countryin the region with regard to energy projects andrecent announcements promise even greater activityin the near future16FOCUS ON ENERGY

SERBIAN ENERGY POLICYThe foundations of the Serbian energy policy are to be found in the Energy Sector Development Strategyto 2015. This was issued by the Serbian Parliament in November 2004 (the “Energy Strategy”). Startingfrom the existing situation in the sectors of energy consumption, energy production and availableenergy resources, the Energy Strategy defines the main goals and priorities for the development of theenergy sector over a 10-year period:istingenergy sources and facilities in the electric sector (including the production, transmission anddistribution of electric energy), oil, gas and heating sectors.main goals here is the substitution of electric energy with natural gas for thermal energy services, adecrease in energy consumption in the production of energy, a decrease in the losses suffered in thedistribution of electric energy and natural gas and the introduction of new energy efficient electricappliances, equipment and facilities.“RES”) and the utilization of new energytechnologies, equipment and facilities which are energy efficient and environmentally friendly.cycle plant and the construction of local combined heat and power (“CHP”) facilities with low tomedium capacities.17the participation in the planning of new strategic energy sources and facilities such as the potentialconnection to regional and pan-European infrastructural systems.The program for the realization of development priorities set in the Energy Strategy is defined by theProgram for the Implementation of the Energy Strategy 2007-2012 (the “Energy Program”), issued bythe Serbian Government (the “Government”). This program will run for a period of 6 years. The EnergyProgram sets the dynamics of the implementation of the priorities set in the Energy Strategy, energyfacilities which need to be constructed, concessions which need to be granted for the construction ofenergy facilities, measures for the stimulation of investment in the energy sector, measures for the improvementof energy efficiency and the utilization of RES, and the protection of the environment.FOCUS ON ENERGYOn an annual level, the energy Balance (the “Energy balance”) sets out the quantities of energy neededfor the given year, available energy resources, the manner of supply of energy to consumers, the necessarysupplies of energy and the capacities of energy facilities which need to be reserved in order to securea continuous and regular supply of energy to consumers. The Energy Balance is prepared by the Ministryof Mining and Energy and is adopted by the Government.SERBIAN ENERGY SECTOR – OVERVIEWIntroductionEnergy is one of the largest sectors of the Serbian economy, accounting to some 10% of the Serbian GDP.The Serbian energy sector consists of oil and natural gas industry, coal mines, an electric power system,a decentralized municipal district heating system and industrial energy. Activities in the energy sectorinclude the production of domestic primary energy, the importation of primary energy (mostly oil andnatural gas), the production of electric power and thermal energy, the production and the secondary processingof coal and the transport and distribution of energy and energy products to energy consumers.

The vast majority of the Serbian energy infrastructure is state-owned and is operated by the public enterprisesthat were established by the state to manage the various domestic energy sectors. The Serbianenergy infrastructure is generally old and outdated, often in a very bad condition due to more than 10years of neglect, a lack of investment, and the severe damage it took during the NATO bombing in 1999.The repair process started in 2000 with the assistance of international funds. However, the process is farfrom being finished, and much of the existing infrastructure is awaiting modernization which will requiresignificant investments by both the public and private sector.Electric Power SubsectorOVERVIEWThe Serbian production of electric power includes power plants with a total power of 7,120 MW, including8 lignite-operated thermal power plants (“TPPs”) with an installed power of 3,936 MW (two ofthese are located in Kosovo), 9 hydro power plants (“HPPs”) with a total installed power of 2,831 MW.In addition to this there are mazute and natural gas operated thermal power plants operated by districtheating companies with an installed power of 353 MW. Almost the entire production of electricity isconcentrated in the Public Enterprise Elektroprivreda Srbije” (“EPS”), which is currently the only producerof electricity in Serbia.18The Serbian power transmission system is consists of 9,500 km of power lines of 400, 220 and 110 kVand accompanying transformer stations, and is interconnected with all the neighbouring countries. Theentire Serbian transmission system is operated by the Public Enterprise “Elektromreža Srbije” (“EMS”).The distribution network consists of the low-voltage network that is located in all major consumer centresand is operated by EPS through its fully-owned subsidiaries for five regional centres including Belgrade,Novi Sad, Kragujevac, Kraljevo and Niš.FOCUS ON ENERGYThe consumption of electricity in Serbia is very high. According to the Energy Balance for 2009, theestimated consumption of electricity in Serbia for 2009 was to be 28,854 GWh. The high consumptionof electricity is due to the fact that the majority of Serbian households use electricity for heatingpurposes. In addition, there is a very low level of energy efficiency and the price of electricity charged tothe consumer is still not sufficient to satisfy the cost of its production. The average annual production ofelectricity is still for the most part sufficient to satisfy the national consumption, but certain quantitiesstill have to be imported every year, usually during the winter when demand is at its highest.DEVELOPMENT PRIORITIESThe modernization and revitalization of the Serbian power plants is seen as an urgent priority. Serbianinfrastructure for the production of electricity is old and outdated (for example, according to the EnergyProgram, some 60% of the total installed power infrastructure belonging to Serbian hydro electricpower plants is more than 40 years old, whilst the average age of Serbia’s thermal power plants is 30years). In the period 2000-2005, significant improvements were made, but there is still much to be donein this respect. In addition to the revitalization and modernization of the existing production capacities,the Energy Program sets out ambitious plans for the construction of new power plants, including thefollowing:harvesting the hydro electric potential of the river Drina (on the Bosnian border), the River Sava, theDanube and the river Morava.currently not active), and the construction of new smaller HPPs (with estimated plans includingsome 856 locations with a total power of 500 MW).

in the Kolubara and Kostolac basins. The opening of new mines facilitating the supply of coal tonew TPPs. The Construction of TPPs which will use imported fuels, primarily imported gas, and thereconstruction of existing power plants.combined production of both heat and electricity.ily,thermal power plants. The Energy Program envisages that the EPS should allocate around EUR1.2 billion for these purposes.energy sector will require investments in the modernization, revitalization, improvement and theextension of the electric power transmission grid which is currently outdated. Its capacities are becomingincreasingly insufficient to cover the domestic consumption of electricity which is expectedto increase in the coming years.PROJECTSGerman company RWE AG (“RWE”). This lays a foundation for the cooperation between the twoparties in the construction of the hydropower plant “Djedrap III” 1 and the cascade HPPs on the riverMorava and the river Drina which are located on the border with the Republic of Srpska. The estimatedvalue of this investment is EUR 5 billion.19structionof the thermal power plants Kolubara B 2 and TENT B3 3 . The estimated value of investmentis EUR 1.6 billion.cooperation between the two countries in the development of new capacities for the production ofelectricity from renewable sources of energy. This included the construction of hydropower plantson the rivers Ibar, Drina and Sava (with a total estimated power potential of 589.2 MW) and smallHPPs and wind farms (with a total estimated power potential of 500 MW). In November 2009, theSerbian Ministry of Mining and Energy and the Italian Ministry of Economic Development and theItalian Ministry for Environment and Protection of the Land and Sea, signed two agreements whichset out the foundation for the establishment of a system for mutual recognition of green certificates,the cooperation of the national transmission grid operators in the improvement of the Serbiansystem for the transmission of energy, and the development of interconnections between theSerbian transmission grid and the transmission grids of the neighbouring countries. In June 2009,national producers of energy, Serbian EPS and the Italian company “Seci Energia S.p.A” signed apreliminary agreement on the cooperation between the companies regarding the construction ofHPPs on the river Ibar and the river Sava (and the possible extension of the project to HPPs on theriver Drina).FOCUS ON ENERGYthe Chinese National Corporation for the Import and Export of Machinery signed a protocol on thecooperation between the two companies in a USD 1.2 billion project for the revitalization of units1 Plans for the construction of the third reversible HPP “Djerdap III” on the Danube river were developed back in the seventies but these plans wereeventually abandoned. The estimated installed power of “Djerdap III” is some 2400 MW and if constructed it would double the production of electricityin Serbia. The estimated cost of construction is somewhere in the region of EUR 6 billion.2 The TPP “Kolubara B” with an installed power of 2x350 MW is located some 40 km southwest of Belgrade, near to the Kolubara coal basin. Itsconstruction started back in 1984 but due to the break-out of war in ex-Yugoslavia, it was never finished. The estimated value of the investment neededto complete the TPP “Kolubara B” is EUR 600 million.3 The new unit of the TPP “Nikola Tesla” with the installed power of 700 MW located on the right bank of the river Sava, 50 km upstream of Belgrade.The estimated value of the investment in the construction of TPP TENT B3 is EUR 900 million.

B1 and B2 of the TPP “Kostolac” (350 MW each) and the construction of the new unit “Kostolac B”.The works should start this year, and are expected to be finalized by the end of 2015.20FOCUS ON ENERGYtionalDevelopment signed a memorandum of cooperation in the area of renewable energy. Thisincludes the commitment of some EUR 223,000 for the development of projects aimed at thepromotion and the use of solar energy.the Novi Sad city government) announced a public tender for the construction of a new gas-fuelledcombined heat and power plant in Novi Sad with a power output of between 400 and 500 MW andwith a heating power capacity of at least 300 MW. The new plant should provide heating for morethan 80,000 households and business users in Novi Sad.Natural Gas SubsectorSerbia has modest domestic figures for the production of natural gas (its planned production for 2009was around 224.2 million m3) from its natural gas reserves located in Vojvodina, the northern provinceof Serbia. Approximately 91% of the natural gas consumed in Serbia is imported.The system for the transportation of natural gas includes a 2,140 km long high pressure pipeline (16-50bar) stretching from the Hungarian border to Niš. The gas pipeline allows for the import of Russian gasfrom Hungary and the transit of gas to Bosnia and Herzegovina. The existing pipeline system is operatedby the public utility company “Srbijagas”, with the exception of Section MG-9 Pojate-Niš, which is operatedby the private company “Yugorosgaz”.The natural gas distribution network consists of 650 km long middle-pressure (4-16 bar) and 3,000 kmof long low-pressure (up to 4 bar) pipeline, and is located mostly in Vojvodina and to a lesser extent,central and southern Serbia. The majority of the distribution network is operated by the public utilitycompany “Srbijagas”, and to a lesser extent by “Yugorosgaz” which is controlled by “Gazprom” and localdistributors.DEVELOPMENT PRIORITIESNatural gas is expected to have an increasingly important role to play in the provision of energy overtime because of its price and its relatively favourable impact on the environment. The main goals in thedevelopment of the gas sector include the following:tureis over 30 years old).

annual figure of 6,100 million m3) to an annual figure of 6,800 million m3.Russian gas. In December 2006 the company ”Gazprom-Export” and the Serbian Ministry of Miningand Energy signed a memorandum of understanding on the construction of a 400 km long gaspipeline with a capacity of 20 billion m3s of natural gas through Serbia.with an annual capacity of 850 million m3 (covering 25% of the annual consumption in Serbia).CURRENT PROJECTSIn 2009, the governments of Serbia and Slovakia signed an agreement on the cooperation between companiesof the two countries in the development of the gas infrastructure in Serbia. This also provided forthe construction of a gas storage depot with a capacity of 500 million m3, and a 100 km long gas pipelinenetwork in South Serbia. The total value of the investment is estimated to be EUR 50.5 million.siannatural gas to the Black Sea to Bulgaria and further still to Italy and Austria. The Serbian legwould run from Zaječar to Belgrade and from there to Subotica. From Subotica one branch runs toAustria ending at the Baumgarten gas hub, while the other branch continues through Hungary andSlovenia to Arnoldstein in Austria near the Italian border to supply northern Italy. The first agreementbetween Russia and Serbia was signed even before the announcement of the South Streamproject. On 20 December 2006, “Gazprom” and “Srbijagas” agreed to conduct a study on the constructionof a gas pipeline running from Bulgaria to Serbia. On 25 January 2008, Russia and Serbiasigned an agreement to route a northern pipe from the South Stream through Serbia which wouldcreate a joint company to build the Serbian section of the pipeline and a large gas storage facility nearBanatski Dvor in Serbia. On 15 May 2009, in Sochi (Russia), the gas companies of Russia, Italy, Bulgaria,Serbia and Greece signed an agreement on the construction of the South Stream pipeline. As perthe earlier 2008 agreement, on 17 November 2009, Russia’s “Gazprom” and Serbia’s “Srbijagas” createdthe company South Stream Serbia AG in Bern, Switzerland. The joint engineering company wasset up to prepare a feasibility study for the Serbian section of project. If an agreement on investmentis reached, the new joint venture will also be responsible for the design, financing and the subsequentconstruction and operation of the pipeline in Serbia. The project is due to be completed by 2015.which is expected to be finalized by the end of January 2010. The investment made in the completionof the first phase (which should allow the storage of some 300 million m3 of natural gas) amountsto some EUR 25 million. “Srbijagas and Gazprom” signed an agreement on the establishment of ajoint company which should finalize the second phase of the construction of Banatski Dvor, where“Srbijagas” holds a 49% share and “Gazprom” has a 51% shareholding. The capacity of Banatski Dvorafter the finalization of the phase two of the construction is projected to be 8,000 million m 3 .21FOCUS ON ENERGYOil SubsectorThe oil subsector consists of the extraction of domestic oil reserves in Serbia, the import of crude oil, thetransportation of crude oil, the refining of oil derivatives, oil derivatives distribution, sales and its export. Domesticoil production has never been sufficient to cover local needs and Serbia has always been an importerof oil, with imports amounting to some 81% of its total annual needs. In addition, domestic production of oiland natural gas has been on the decline since 1996, mostly due to the low level of investment in the maintenanceof domestic production, and the low intensity of exploration operations because of a lack of funds.

The oil transportation system includes the 154.4 km long section of the ex-Yugoslav oil pipeline from theriver Danube on the Croatian border (the starting point of the pipeline is in Omišalj, Croatia) to oil refineriesin Pančevo and Novi Sad. It is operated by the Public Enterprise “Transnafta”.Serbia has two oil refineries both held by “Naftna Industrija Srbije” (“NIS”) (controlled by Gazprom). Theoriginal capacity of the domestic refineries was 7.8 million tonnes per year (4.8 million tonnes in Pančevoand 3 million tonnes in Novi Sad). Due to damage suffered during the NATO bombing in 1999, the operationalcapacity of Serbian oil refineries has been reduced to 6.6 million tons (4.8 million tons in Pančevoand 1.8 million tons in Novi Sad).The majority of the Serbian oil and oil derivatives distribution network is held by NIS (some 480 outlets)while the remaining 800 are operated by private companies, including the Austrian company “OMV”,“Lukoil”, “MOL”, “Hellenic Petroleum” and others.DEVELOPMENT PRIORITIES/PROJECTS22FOCUS ON ENERGYfrom the Caspian and Black Sea regions is starting from the Romanian port of Constantza and expandingthrough Serbia, Croatia and Slovenia to Trieste in Italy. The 200 km long Serbian section ofthe PEOP should enter Serbia at Bela Crkva, proceed along by Deliblatska peščara and then proceedby Pančevo and Novi Sad to Sotin which is along the border with Croatia and follows the route of theexisting oil pipeline. In April 2007, all five interested states and the European Energy Commissionersigned a ministerial declaration on PEOP. In February 2008, a general meeting of the Interstate Committeefor PEOP took the decision to incorporate a project development company, headquartered inLondon, England and the company was then registered in June that year. Its task will be to promotethe PEOP and to attract investors interested in the project. Serbia appointed “Transnafta” to act asthe founder of the project development company on its behalf.linesystem through Serbia with a total length of approx. 400 km (the “Petroleum Products PipelineSystem”). The pre-feasibility study with a general design for the Petroleum Products Pipeline Systemis prepared. In November 2007, the pre-feasibility study received a positive evaluation by the RevisionCommission of the Ministry for Infrastructure. At the end of January 2009 in Smederevo, therepresentatives of the Ministry of Environment and Spatial Planning, the Ministry of Mining and Energy,cities participating in the project, and “Transnafta” all signed a memorandum of understandingon the support of the construction project for the Petroleum Products Pipeline System.Coal SubsectorThe Serbian coal sector includes the coal extraction and processing of coal. Coal is the most widely foundfuel in Serbia, accounting for 51% of the total Serbian primary energy supply.The majority of Serbian coal production is from two open-pit mines in Kostolac and Kolubara (some36,930 million tonnes were extracted in 2009). Both the pits are operated by EPS. The total reserves oflignite coal are estimated at some 2.3 billion tonnes.95% of lignite coal from open-pit mines is used for the production of electricity in the thermal powerplants. In addition to lignite coal, Serbia also has smaller reserves of hard coal and brown coal which isexcavated from eight underground pit mines.Development priorities in the coal sector include the opening of additional units in the Kolubara basin,the revitalization of existing cost effective capacities and an investment in more environmental practicesat the existing mining facilities. Such cost effective and environmental practices are a general goal for allmining basins in Serbia.

District Heating SystemThe Serbian heating system consists of the decentralized heating sources located in 50 cities and townsin Serbia. These are primarily fuelled by natural gas, with an installed thermal capacity of 6,597 MWt andhave functional distribution networks. The heating system is managed by local self governments that arealso responsible for their financing and operation.Very few Serbian households are connected to the district heating system (according to data from 2007only 22% of Serbian households are). The existing heating system is outdated (for example, more than60% of the existing distribution network infrastructure is over 20 years old) and it is badly in need of repair.This causes significant problems in the supply of heat to consumers. This has forced many consumersto turn to alternative sources of heat, primarily electrical energy. For this reason, one of the main prioritiesof the development of energy sector is the revitalization and modernization of the existing centralheating system, and an increase in the number of users (according to the Energy Program 100,000 newconsumers should be connected to the heating system by 2012).Industrial Energy SystemThe industrial energy system consists of heating sources of around 6,300 MW of thermal power. Theseheating sources are dispersed amongst several hundred industrial companies in Serbia and are used for theproduction of industrial steam and heat and for the heating of industrial facilities. In about 30 industrialcompanies there are power plants facilities that combine the production of thermal energy and electricity(with a capacity of around 250 MW), but most of these have not been operational for some time.23The main feature of the industrial energy system is that it is outdated (over 74% of the existing facilities areover 20 years old, and over 30% of the facilities are more than 30 years old), it has a very low level of energyefficiency and a high dependency on imported sources of energy (mostly oil and natural gas imports whichamount to over 80%). The estimated investment needed for both the modernization of existing equipmentand the installation of new equipment in the industrial energy system is some EUR 400 million.Renewable EnergySerbia has significant RES. According to the Energy Program, the estimated value of renewable energysources to Serbia could be somewhere in the region of 4.3 million tonnes of oil equivalent “toe” annually.Available renewable energy sources of Serbia include:FOCUS ON ENERGYBiomass fuels: around 2.7 million toe annually, out of which 1.0 million toe are wood and more than1.7 million toe are attributable to agricultural biomass. Unused potential of hydro-energy: around 0.6 million toe annually (estimated on the basis ofthe Cadastre of the Small HPP’s from 1987, including 856 locations for the construction of the smallHPPs, out of which 90% of the locations have a technical potential of power below 1 MW).Geothermal sources: around 0.2 million toe annually, located in the territory of Vojvodina, Posavina,Mačva, Podunavlje and the wider area of Central Serbia as well as in existing Serbian spas.Wind energy: around 0.2 million toe annually.Solar energy: around 0.6 million toe annually.The utilization of the available sources of renewable energy is very high on the list of priorities of theEnergy Strategy. This is primarily for the satisfaction of Serbia’s energy needs on the local level, thereduction of energy imports and the improvement of the environmental aspects of the production ofenergy. Furthermore, as a signatory state of the Energy Community Treaty, Serbia assumed an obligation

to implement the Directive on the Promotion of Electricity Produced from Renewable Energy Sources inthe Internal Electricity Market and the EU Directive on the Promotion of the Use of Biofuels or Other RenewableFuels for Transport 4 . This relates to the promotion of the production of biodiesel and other fuelsfrom RES in the traffic sector.While there is great interest by both Serbian and foreign investors in the exploitation of RES, at this point,except for the hydro-potential, the majority of which has been already used, in other sectors of renewableenergy, the number of constructed facilities for the production of renewable energy is extremely low.Capital invested for these purposes is insignificant and mostly local. The technical and technological levelof the equipment installed in the existing facilities falls below the standards applicable in the EU. Thelow level of investment in this sector of energy is due mostly to the inadequacy of the existing regulatoryframework, complicated administrative procedures, and the long absence of a system of subsidiesto promote investment in renewable energy. Other factors include the absence of licensed producers ofthe equipment needed for the production of renewable energy, and the absence of reliable informationabout the renewable energy capacities in certain locations, which prevent the inclusion of these locationsin urban and spatial plans.PARTICIPANTS IN THE ENERGY SECTORIntroduction24The principal pillars of the institutional framework in the energy sector are the Government and the Ministryfor Mining and Energy, the Energy Agency of Serbia (the “Energy Agency”) and the Serbian Agencyfor Energy Efficiency (the “Energy Efficiency Agency”).FOCUS ON ENERGYOn the local level, certain regulatory functions in the energy sector, primarily with respect to the decentralizeddistrict heating system are assigned to the local municipalities.The majority of the Serbian energy infrastructure is operated by the public enterprises established by theGovernment. This makes public energy enterprises an important factor to consider when examining theoperation and the regulation of the energy sector as a whole.Regulatory BodiesTHE GOVERNMENTThe Government performs the primarily policy-making functions in the energy sector. The Governmentprepares the proposal of the Energy Strategy, and gives its final approval to the Energy Program preparedby the Ministry of Mining and Energy.The Government supervises the energy pricing policy as it gives its approval to the prices of energy asestablished by the energy producers.As the founder of public enterprises in the energy sector, the Government has the final word in their management,and it gives its approval to any significant corporate changes and major investment decisions.THE MINISTRY OF MINING AND ENERGYThe MEM is in charge of the implementation of the energy policy as defined by the Government and theSerbian Parliament. It performs the various administrative, regulatory and supervisory functions in thesectors of energy and mining, electric energy, oil, gas, heating power and nuclear power.The MEM prepares the proposal of the Energy Program and the annual Energy Balance.Within its regulatory functions, the MEM prepares draft proposals of energy laws and issues regulationsfor the implementation of energy laws. The MEM is over the issuance of energy permits for the construc-4 Directive 2003/30/EC

tion of energy facilities. Through the Energy Inspectorate the MEM monitors compliance with the variousenergy laws and regulations by the participants in the energy sector. It also supervises the design, constructionand maintenance of the energy facilities as well as the quality of the energy supply available tothe consumers.THE ENERGY AGENCYThe Energy Agency is the main regulatory body in the energy sector. The Energy Agency decides, amongstother things, about the issuance and termination of the energy licenses, it establishes a tariff system forthe calculation of energy prices and monitors the application of these tariff systems by the participantsin the energy sector. It also approves on the rules of operation regarding the transmission, transportationand distribution network that are issued by the various system operators. Finally, it decides on appealsthat have been made against system operators where the system operators have denied a third partyaccess to the transmission, transportation and distribution networks.THE ENERGY EFFICIENCY AGENCYThe Energy Efficiency Agency was established in 2002 with the goal of promoting and enhancing energyefficiency in Serbia. The current status and operations of the Energy Efficiency Agency are regulated bythe 2004 Energy Law.The Energy Efficiency Agency operates as a primarily consultative body and does not have any regulatorypowers. The main duties of the Energy Efficiency Agency are to propose measures for the improvementof energy efficiency and to manage and coordinate programs for the rational consumption of energy andthe use of renewable energy resources.25The Energy Efficiency Agency is managed by a director appointed by the Government and it is answerableto the Government for its action.MINISTRY OF ENVIRONMENT AND SPATIAL PLANNING (“MESP”)The MESP decides about the issuance of permits necessary for the construction of energy facilities, includinglocation permits, construction permits and use permits.In addition, the MESP decides about the issuance of environmental permits which need to be obtained byinvestors in the energy sector. This includes the granting the approval of an environmental impact assessmentstudy and integrated environmental permits.FOCUS ON ENERGYTHE MINISTRY OF AGRICULTURE, FORESTRY AND WATER MANAGEMENT(“MAFWM”)MAFWM is in charge of the regulation and supervision of Serbian forests and waters, directly or throughpublic enterprises established by the Government to manage these resources. Such enterprises are thePublic Enterprise “Srbijašume”, established to manage and supervise the use of the national forests andthe Public Water-management Enterprise “Srbijavode” which is in charge of the management and theuse of national waters.LOCAL GOVERNMENTSLocal governments are responsible for the preparation of the “Program of Development of the EnergySector” in their respective territories in accordance with the Energy Strategy. They perform regulatoryfunctions with regard to their respective district heating systems.

Public EnterprisesPUBLIC ENTERPRISE “ELEKTROPRIVREDA SRBIJE” (“EPS”)EPS is currently the only producer of electricity in Serbia. Through five of its fully-owned subsidiaries, EPScurrently operates the entire natural infrastructure for the production of electricity.EPS operates the national distribution grid through five fully-owned subsidiaries. These are in charge ofthe operation of the distribution networks located in five of the regional centres in Serbia: Belgrade, NoviSad, Niš, Kragujevac and Kraljevo.In addition, EPS manages two mining basins for the excavation of lignite coal - Kostolac and Kolubara (providingthe supply of coal for the thermo power plants) mostly used by TPP “Kolubara” 1 and TPP “Nikola Tesla” 2 .The privatization of EPS has long been on the agenda of the Serbian Government but so far, there wereno concrete movements towards the realization of this plan. The prevailing opinion of the experts andthe investment community is that EPS will be ready for the privatization process only after it has beenrenovated and only after the full liberalization of the energy market and the reform of the energy regulatoryframework.PUBLIC ENTERPRISE “ELEKTROMREŽA SRBIJE” (“EMS”)26EMS operates the national transmission grid system and is the operator of the organized market for electricalenergy. In its capacity as the operator of the transmission grid, EMS decides on third-party accessand connection to the transmission grid and it is also responsible for the allocation of the cross-bordertransmission capacities. As the market operator, EMS is also responsible for the issuance of the rules ofoperation of the electricity market governing the trade of electricity on the organized market.FOCUS ON ENERGYPUBLIC ENTERPRISE “SRBIJAGAS”“Srbijagas” manages the national infrastructure for the transportation and distribution of natural gas. Inits capacity as the operator of the natural gas transportation and distribution systems, “Srbijagas” shouldissue the transportation and distribution network rules of operation which should govern the technicalterms for the connection and use of the transportation and distribution systems. To date, no such ruleshave been issued.Aside from the transportation and the distribution of natural gas, “Srbijagas” should also act as the operatorof the natural gas storage facilities. Whilst it is supplied with the relevant licenses, “Srbijagas” is notyet effectively conducting this activity as it has not yet finalized the construction of its gas storage facility“Banatski Dvor” in Vojvodina.PUBLIC ENTERPRISE “TRANSNAFTA”“Transnafta” operates the national oil pipeline system. As the operator of the oil transportation system“Transnafta” should issue the oil pipeline grid code which should prescribe, amongst other things, theterms governing third-party access, as well as technical terms for the connection to the pipeline system.“Transnafta” has not yet issued the transportation system grid code. “Transnafta” also holds the licensefor the oil products pipeline but this pipeline has not yet been constructed.1 TPP “Kolubara” is located at the edge of Kolubara coal basin in the village Veliki Crljen, and is operated by EPS. The total installed capacity of its fiveunits amounts to 245 MW.2 TPP Nikola Tesla, with its two units TENT A and TENT B, is a power plant complex operated by EPS, located on the right bank of the river Sava,approximately 40 km upstream from Belgrade, near the town of Obrenovac. By far the largest in Serbia, the complex generates around 16 TWh annually,which covers almost half of Serbia’s needs for electricity.

Private SectorGiven that the liberalization of the Serbian energy sector started relatively recently, the Serbian energymarket is still largely dominated by public enterprises. The gradual liberalization of the energy market hasbrought private companies into the Serbian energy sector, but their presence is currently limited to a participationin energy trading, mostly of electricity, oil and natural gas, whilst the production, transportationand distribution of energy remains, at least for now, in the public domain.Notwithstanding the above, the liberalization of the energy market and the planned integration of theSerbian energy market into the energy market of the European Union under the auspices of the EnergyCommunity Treaty have resulted in increased interest from foreign energy companies regarding investmentin Serbia’s energy sector. In that respect, a number of major energy companies are currently surveyingthe potentials of the Serbian energy sector, whilst some of them have entered informal agreementswith the Serbian government regarding investments in major infrastructural energy projects.The interest of the private sector in Serbia’s energy infrastructure is notable particularly in the area ofrenewable resources. Serbian renewable energy resources have attracted a number of local and foreigncompanies which have applied for a variety of specific energy permits. These have mostly related to theconstruction of small hydro power and wind power plants as well as the exploitation of biomass fuels.Their presence in the private sector is also visible in the gas sector where private companies are participatingin the development of the natural gas distribution network.ČEZ27The largest Czech producer of electricity has long been striving to acquire the leadership position in theelectricity market of South-Eastern Europe. ČEZ has been present in Serbia through its fully owned subsidiary“Čez Srbija d.o.o.” since 2006 and is currently looking for acquisition opportunities in the Serbianelectricity sector. It has acquired a license for the trading of electric energy and is an active participant inthe Serbian electricity trading market.FOCUS ON ENERGY

RWE AGGerman company “RWE” has not yet established any formal presence in Serbia, although it has been involvedin intensive discussions with the Government about investment possibilities in the Serbian energysector. The result of these activities has been the execution of a memorandum of understanding betweenthe EPS and the Government envisaging the future cooperation between RWE and EPS on the constructionof the HPP “Djedrap III”, and the cascade HPPs on the river Morava and on the river Drina on Serbia’sborder with the Republic of Srpska.EFTThe “Energy Financing Team” is a company owned by private investors and is the largest trader of electricityin South East Europe.GAZPROM28The Russian company “Gazprom” is currently the single largest investor in the Serbian oil and gas sector.In 2009 its subsidiary “GaspromNeft” bought a 51% share in NIS, the largest oil company in the SoutheastEurope. It is involved in the exploitation, processing and sale of both oil and oil derivatives as well asthe production of natural gas. NIS’s exploitation capacities include 1 million tons of oil equivalents annually.Its processing capacities include two oil refineries, with one in Pančevo and one in Novi Sad. Thesehave a total processing capacity of 7.3 million tons annually. It manages the retail network for the sale ofoil derivatives in Serbia, consisting of some 480 sales outlets.FOCUS ON ENERGY“Gazprom” is now the major player in the planned gas expansion of Serbia. Through the company“Yugorosgaz” where it holds a majority 50% share (another 25% is held by “Srbijagas” and remainingshares are held by the “Austrian Central ME Energy & Gas GmbH”), it holds the concession for the constructionof the natural gas transportation system section from Niš to Dimitrovgrad which should connectthe Serbian gas transportation system to the Bulgarian natural gas transportation system.“Yugorosgaz” has also acquired the concession to construct the 123 km long natural gas transportationsystem from Niš to Prokuplje to-Priština which will allow it access to the gas market in Kosovo. After itfinalizes the Niš to Dimitrovgrad gas line, “Yugorosgaz” will be able to sell gas directly to customers in thesouth of Serbia, Kosovo and in Montenegro.So far, “Yugorosogaz” has completed the 62 km long section from Niš to Pojate. In addition it operates theparts of the distribution network that connect Niš, Ražanj, Aleksinac and Aleksandrovac. “Yugorosgaz” holds alicense for the trade of natural gas and holds a major share in the sale of natural gas imported from Russia.Finally, with “Srbijagas”, “Gazprom” will participate in the financing and construction of the Serbian sectionof the “South Stream” pipeline through Serbia, which is probably the single largest investment project inthe Serbian energy sector. The two companies have already established a joint company in Switzerland forthis purpose, where “Srbijagas” holds 49% of the shares and where “Gazprom” has a 51% shareholding.TELEFONIJA“Telefonija” a.d. is a Serbian company involved in, amongst other things, in the development of the naturalgas distribution network. To date, Telefonija has constructed a natural gas distribution network mostof which is located in the Vojovodina region, but it has plans to expand its gas distribution network toother regions in Serbia.RAFINERIJA NAFTE BEOGRAD“Rafinerija Nafte Beograd” is a company that produces oil derivatives. It currently operates as part of the“Neochimiki group”.

FABRIKA MAZIVA A.D. KRUSEVAC“FAM Kruševac” is the only domestic producer of lubricants with a significant export business. It is a partof the “NIBENS Group”.RETAIL SELLERS OF OIL DERIVATIVESThere are a number of both domestic and international companies that have a developed network ofretail outlets to facilitate the sale of oil derivatives including “OMV”, “MOL”, “Lukoil”, “Hellenic Petroleum”and others.29REGULATORY FRAMEWORKSources of LawFOCUS ON ENERGYThe structure of the Serbian regulatory framework in the energy sector is established by the Serbian energylaw (the “Energy Law”). The Energy Law was issued in 2004 as a part of the overall reform of the Serbianenergy sector. This had the goal of introducing transparency, non-discrimination and competition into theSerbian energy sector. It also aimed at promoting energy efficiency and the utilization of renewable energysources. The Energy Law regulates all the major energy sectors including electricity, oil, gas, heat and the systemof incentives of the renewable energy. General rules prescribed by the Energy Law are elaborated on by anumber of regulations issued by the Government in all the sectors of energy that the Energy Law regulates.In addition to legislation regulating specific energy activities, various aspects of energy activities are regulatedby a number of other laws, such as the laws governing the construction, the utilization of naturalresources and environmental laws.Energy PricesIn Serbia, the prices of energy can be both regulated and unregulated, depending on whether the energy(including electricity, gas and heat) is supplied to the tariff buyers or to the qualified buyers of energy.A tariff buyer is any buyer who does not qualify as a qualified buyer as defined by the Energy Law. Theprices of energy supplied to the tariff buyers are regulated and are established by the supplier (EPS) in

accordance with the Energy Law, the tariff system and the methodology for the establishment of tariffs.These are issued by the Energy Agency, with the approval of the Government.Qualified BuyersBy signing the Energy Community Treaty, Serbia assumed an obligation to grant the status of qualifiedbuyer within the meaning of the European Community Directive Concerning Common Rules for the InternalMarket of Electricity 3 and the European Community Directive Concerning Common Rules for theInternal Market in Natural Gas 4 .In 2008, the Energy Agency adopted two resolutions establishing the minimum level of annual consumptionof electricity and gas which qualifies the consumer for the status of a qualified buyer. According tothese resolutions, non-household consumers may qualify for the status of a qualified buyer irrespectivelyof their annual consumption of electricity or gas, while the household consumers qualify for this status iftheir annual consumption exceeds, for electricity 200,000 kWh, and for natural gas - 50,000 m3.30The Energy Law provides that any buyer may obtain the status of a “qualified buyer” if, within the last 12months, the total energy consumption of that buyer exceeded the defined annual energy threshold setby the Energy Agency.Given the very low prices of electricity and gas, no company or household in Serbia has had to apply forthe status of an eligible buyer.Renewable EnergyFOCUS ON ENERGYThe promotion and development of renewable energy is high on the list of priorities in the Energy Strategyand the Energy Program. In line with this, the Energy Law lays down the foundations of the regulatoryframework which stimulates investment in RES energy, including the rules governing the status ofa qualified producer of energy and the list of incentives which should be provided to qualified producersof energy.Investors eligible for the status of qualified producer include:1. Producers that use RES (RES: is defined by the Regulation on the Terms and Conditions for the Statusof the Qualified Producer), or the fuel sources separated from communal waste (depot powerplants);2. Small electric power-plants – electric power plants with an installed power of up to 10 KW; and3. Combined power plants producing electric energy and heat, once they fulfil the conditions relating toenergy efficiency.The procedure for acquiring the status of a qualified producer involves the filing of a request to the MEMincluding the submission of evidence of the fulfilment of the Energy Law requirements and the accompanyingregulations issued by the Government. The MEM is required to issue a ruling on a request within 30days of the filing of such a request.Under the Energy Law, qualified producers are entitled to various incentives aimed at the stimulation3 EC Directive 2003/54/EC4 EC Directive 2003/55/EC

of investment in the RES, including special energy prices, tax incentives, customs incentives and other.Except for the general list of incentives which may be granted to the qualified producers, the Energy Lawdoes not provide any further provisions which would regulate in detail the incentive schemes for producersusing RES.Thus far, the only incentive provided to the qualified producers is the feed-in-tariff provided under thelong-awaited Government Regulation on the Incentives for Investment in the Production of Energy fromRenewable Energy Sources in Combined Heat and Power Plants (the “Incentives Regulation”) 5 .Under the Incentives Regulation, qualified producers of energy are entitled to conclude a 12-year contractwith a supplier of electric power (i.e. EPS) for the sale of electricity under the fixed prices prescribed by theIncentives Regulation. The Incentives Regulation sets a scale of guaranteed prices for qualified producers,depending on the type and the installed power of the facilities for the production of energy from renewableenergy sources.The electricity supplier, on the other hand, is required to conclude the contract with the qualified producer,at its request, within 30 days of the submission of such a request. Other terms of this contract are notdefined by the Incentives Regulation. It seems that the Regulation leaves these obligations to the electricitysupplier who should develop a model agreement for use when contracting with qualified producers(presumably to be used for each qualified producer) and then submit it to the MEM for its approval.On the other hand, the supplier is entitled to the compensation for the costs purchasing the electricityfrom the qualified producer. These are calculated in accordance with the methodology established bythe Incentives Regulation. An EPS is entitled to compensate these costs through the price of electricityto the tariff consumers. This essentially means that the final customers will eventually end up paying forthe subsidy.The regulatory framework for RES is by no means complete. Serbian energy laws and regulations containno rules which would guarantee it priority over other non RES producing qualified producers in relationto access to the transmission system. Also, while the Energy Law provides for the general possibility thatqualified producers be granted incentives which would stimulate investment in this sector of energy (suchas tax incentives and other), except for the feed-in-tariff, relevant Serbian laws and regulations provideno other incentives for the producers using RES. In fact, it is not clear from the Energy Law who shouldprovide these incentives and when these incentives should be provides it is also unclear under what termsthey should be provided.31FOCUS ON ENERGYSubsidies available under current regulations are available only to producers of electric energy, but thereare no incentives for other sectors, such as for example, the production of bio-fuels, which is an obligationwhich Serbia assumed through the Energy Treaty providing the obligation of the signatory states to implementthe EU Directive on the Promotion of the use of biofuels and other renewable fuels for transport.Serbian energy laws and regulations do not provide for a system of minimal mandatory quotas regardingthe participation of RES in the total supply of energy by energy producers, nor is there an accompanyingsystem for the issuance of certificates of origin or the so called “Green Certificates”.Serbia has not yet established a system to identify locations for the production of energy from renewableenergy sources. Accordingly, such locations are not included in relevant spatial planning acts. There areno licensing systems for the producers of equipment relating to the production of energy from renewablesources. The incentives for investment in this area are limited only to the feed-in tariff provided by theIncentives Regulation, but there are no incentives such as tax breaks under the Energy Law.5 The Incentives Regulation came into force on 1 January, 2010 and will remain in force by 31 December, 2012.

NEWS ARTICLEITALYENCOURAGESLONG-DISTANCE TRANSMISSIONCONNECTIONS AND CONSTRUCTIONOF POWER PLANTS IN WEST BALKANS32FOCUS ON ENERGYNew long-distance transmissionconnection between Romania,Serbia and Montenegro with asubmarine cable from Tivat (Montenegro)to Pescara (Italy) is supportedby the new Italian energystrategy which attempts to solve apart of the electricity supply problemsin the central and southern part of Italy. Due to thesignificant ecological issues in Italy this has been recognizedas a large-scale problem and for that the attemptsfor partial solution of the problem with a submarinehigh-voltage cable conduit with the capacity of 1000MW have been set in motion, in addition to the importantenergy investments mainlyin the West Balkans countries.Recent ratification of agreementbetween Italy and Montenegro onconstruction of a submarine cableconduit from Tivat to Pescara, thetotal value of which is 720 millioneuros, should bring the matterone step closer to realizationof the ratified energy agreementbetween Serbia and Italy, whichprovides for the hydropower plantconstruction with the capacity of approximately 600MW and wind parks with the capacity of approximately500 MW.Author: Dragan ObradovićBelgradeSource: Energetika.NETRegional Energy Newswww.energetika.net/seeTwo energy agreements have been signed betweenSerbia and Italy. One of them envisages joint constructionof production capacities in the field of electricitypower generation from renewables and the other determinesthe incentive measures and mechanisms forproduction and export of electricity, the price of whichis a few times higher than the commercial electricityprices in Serbia.“We have signed an agreement on utilization of a partof the hydro potential as a renewable source of energyand of a part of the potential wind energy. Wehave agreed that the capacity of about 1000 MW willrepresent indicative installed power for productionof clean electricity and export of clean electricity toItaly. The promoted price (feed-in tariff) for hydroenergyin Italy is as high as 18 euro cents per kWh, regardlessof the installed capacities. That means thatthis price promotes not only production capacities inhydropower plants of 10 MW butalso in hydropower plants of 200and 300 MW, which can be veryinteresting for our participants,particularly for ElektroprivredaSrbije (EPS),” said Serbian Ministerof Energy Petar Skundric.This price is four to five timeshigher than the commercialelectricity price in Serbia andconsidering the Serbian feed-intariffs, twice as high. Accordingto Skundric, an agreement with Italy has also beenmade regarding the project of construction of hydrocentralsystem on the river Ibar. This agreementprovides for construction of ten smaller hydropowerplants on this river, with the total capacity of up to100 MW (individually from seven to nine MW), whileon the mid part of the Drina river three hydropowerplants with the total capacity of 365 MW should be

33FOCUS ON ENERGYconstructed, says the Serbian Ministry of Energy. Apossibility of construction of one new 140 MW hydropowerplant Kupinovo on the river Sava will bestudied as well.The capacity of the total anticipated hydropotential isabout 600 MW and with the obtained energy licence theItalian partners have an option to build small hydropowerplants as well; this could increase their participation. Inaddition, 500 MW of wind power is also anticipated. Theactual physical realization of these projects is envisagedto start this year and the ownership structure will be definedwith an agreement between partners (companies)from Italy and Serbia. A precondition to transmit theelectricity generated in Serbia to Italy is the constructionof a submarine interconnection cable conduit for directcurrent with the capacity of 1000 MW. According to theinitial projections, this cable conduit should be set up by2013. In order to transmit green electricity from renewablesources of energy from Serbia to Montenegro, thepublic company Elektromreža Srbije (EMS) should soonsign a triple memorandum with Prenos from Montenegroand with Terna from Italy on construction of a new400 kV long-distance transmission system. Accordingto EMS, the point of this long-distance transmission issupposed to be located in West Serbia (in Bajna Basta).With the new 400 kV connection with Romania, whichis going to be established shortly, this would strengthenthe electricity transmission from Serbia to the Easternand Western Europe.

SERBIAKOSOVOКосово/ KosovëPRISTINAINTRODUCTIONKosovo declared its independence from Serbia in february 2008. Although some countries recognised theRepublic of Kosovo as an independent country, from the point of view of the United Nations and a majorityof countries, Kosovo is still formally a part of Serbia.34Considering the excellent opportunities that are available across different business sectors, Kosovo isincreasingly becoming an attractive place to do business. As a result, interest from foreign investors hasbeen increasing steadily in recent years and this has resulted in an increase in foreign direct investment(“FDI”). According to the Kosovan Business Registry data for 2007, there are 2,012 companies of foreignand mixed ownership that have already invested in Kosovo.Kosovo joined the Multilateral Investment Guarantee Agency in 2009. It is expected that this will furtherencourage foreign investment and support “World Bank” initiatives in Kosovo.FOCUS ON ENERGYThe local economy is nevertheless hindered by Kosovo’s still-unresolved international status, which hastraditionally made it difficult to attract investment. The province’s economic weakness has produced athriving black market economy. The prevalence of official corruption and the pervasive influence of organizedcrime gangs continues to cause serious concern internationally.Kosovo has a reported foreign debt of 1,264 billion USD that is currently being serviced by Serbia.REGULATORY FRAMEWORKBasic Energy LegislationThe energy sector in Kosovo is governed by the following laws: (i) The Law on Energy; (ii) The Law on theEnergy Regulator; (iii) The Law on Electricity; (iv) The Law on Natural Gas; (v) The Law on Spatial Planning;and (vi) the Law on Mines and Minerals. The basic energy legislation was drafted in accordance with EuropeanUnion (“EU”) Directives and in compliance with the principles of the Athens Process for the creationof the Regional Energy Market 1The main bodies which create, regulate and supervise the energy sector in Kosovo are the Ministry of Energyand Mining of Kosovo (“MEMK”) and the Regulatory Energy Office of Kosovo (“REOK”).MEMKMEMK has a wide scope of functions and is the main creator of the long-term and short-term energypolicy in Kosovo, in close cooperation with the Kosovo government. MEMK is also charged with drafting1 Read more on the Athens Process in the “INTRODUCTION TO SOUTH EAST EUROPEAN REGIONAL ENERGY COMMUNITY TREATY”section

the regulations regarding the energy sector and energy policy in Kosovo. Furthermore, MEMK leads theco-operation and communication between the different players on the energy market and plays the mainrole regarding the integration of the market. In addition, MEMK manages and operates the foreign investmentsin the energy sector and drafts the state Energy Balance, promotes energy programs and investmentsin the renewable energy sector. In 2005, the MEMK passed the draft “Energy Strategy of Kosovo”.For more information on the MEMK, please refer to the section entitled “Important Key Players”.REOKREOK was established in June 2004 as an independent body which regulates the activities in the energysector in Kosovo (including electricity and gas) in accordance with the obligations arising from the EnergyCommunity Treaty. REOK is authorized to issue energy licenses. It also regulates energy tariffs and themethodology used for the determination of the energy cost of such energy tariffs. REOK also assists in theharmonization of the Kosovan energy legislation in accordance with acquis communautaire.Energy StrategyOn November 2002, UNMIK signed the Athens Memorandum. In December of 2003, UNMIK signed thesecond “Memorandum of Understanding”, including the establishment of the regional gas market andthe proposal for a common approach on environment. After the signing of these documents, the KosovanGovernment faced a huge challenge to develop the energy sector in order to comply with all commitmentsput forward for the establishment and operation of the Energy Community. At the same time itwas trying to exploit all of the opportunities that came out its involvement in the Regional Energy Marketsuch as renewable energy.35The Energy Strategy of Kosovo (the “Energy Strategy”) is the basic document that stipulates the energypolicy and the planning of the Kosovo market. The Energy Strategy has been prepared in accordance withESTAP I-II (World Bank 2002- 2005) 2 , as well as expert feedback from the EAR 3 and the RIINVEST institute4 . The Kosovo Energy Strategy is divided in two main chapters (i) short term strategy and (ii) long termstrategy. The short term strategy includes a planned strategy for the period of three years (until 2011),and the long term strategy plans the Kosovo energy market until 2015.Oil & GasThe oil and gas market is regulated by the Kosovo’s “Law on Natural Gas” and “Law on Trade with Oil andOil Derivates”. These laws stipulate the basic principles for the transfer, distribution, use and storage ofoil and gas in Kosovo.FOCUS ON ENERGYGASAll natural gas utilities in Kosovo related to the transmission or distribution network have as their commonaims the transmission, storage, distribution and the achievement of a continuous supply of naturalgas. The natural gas system in Kosovo is integrated to the natural gas systems of other countries in theregional market (but only if these systems are in compliance with the technical and security standards ofthe EU). The distribution of gas is considered to be a public service in accordance with the Kosovan regulationson oil and gas.The policy in the natural gas sector is created by the MEMK in coordination with the Kosovan Government,the REOK and the Kosovan Regulator’s Office (“KRO”). The established policy created by the MEMKis revised every three years.The KRO is a regulatory body that organizes the competitive natural gas market and is authorized to regulatecompanies that work with gas (i.e. safety measurements, the efficiency of the supply of gas, measure-2 The overall objective of ESTAP II/1 project is to prepare and submit a feasibility study report of the selected and recommended line and substationsof the Kosovo, Serbia and Montenegro energy sector.3 European Agency for Reconstruction4 Economic Research Institute RIINVEST, Pristina

36FOCUS ON ENERGYments with respect to the environmental protection, consumer protection, competition of the market,etc.). The KRO is obliged to pass an annual report on its work to the Kosovo Government.The construction of a new generating capacity, new gas transmission and distribution networks and directpipelines for the transit of gas in Kosovo may be obtained through two separate procedures. There is anauthorizing procedure and a tender procedure. The authorizing procedure is basically obtained if the interestedsubject meets the below listed criteria for the issuance of a license. The tender procedure only takesplace if the authorizing procedure has failed.Licenses for the transfer, accumulation, supply, trade, and cross border transit of gas may be obtained byan energy company that holds a license issued by the REOK. The two required licenses can be obtained followingan 80 day procedure which results in the granting of one license for the whole territory of Kosovofor the transmission network operator of gas; and a second license for a distribution network operator ofnatural gas covering each distinct territory in Kosovo.The energy company must meet certain general criteria in order to obtain such licenses. It must:1. Possess a sufficient level of technical and financial capabilities; have sufficient material and humanresources and it must have the requisite organizational structure for meeting the regulatory requirementsunder the license;2. Hold property rights over (or a legal right to use) the energy facilities needed to perform the activity;3. Provide evidence that the energy facilities meet the requisite safety and environmental protectionrequirements;

4. Not be insolvent or in a process of liquidation or bankruptcy; and5. Not have had a license for the same activity withdrawn from it within five years of the date that theapplication is submitted.An energy company that holds a gas transmission network license may not obtain a license for the generation,distribution, supply or trade of gas. Also, an energy enterprise holding a distribution networkoperator of gas license may not obtain a license for any other activity in gas that is subject to licensing.The license is not required for the accumulation of natural gas up to the amount of 10,000 m3.The Government of Kosovo selects and designates legal persons as candidates for the operating of thetransmission and storage systems. In order to be eligible, candidates must apply to the KRO for a licensewithin 60 days from the day of their selection by the Kosovan Government as a suitable candidate.OILIn order to engage in the transport, storage, or sale of oil and/or oil products, (within a wholesale or retailcapacity for commercial purposes in Kosovo), a prior license must be obtained from the Council for Oiland Oil Products that operates within the MEMK (the “Kosovo Oil Council”).The Kosovo Oil Council grants the following licenses:motor oil, anti-freeze and brake fluid).37Kosovan legislation stipulates the general rule that there shall be no limitation on the number of licensesthat may be issued by the Kosovo Oil Council. All licenses are passed for a period of two years.The Kosovo Oil Council also recommends standards for petrol and diesel fuel quality in order to reducevehicle emissions deemed harmful to the environment and to ensure that Kosovo does not become anattractive market for the marketing of low specification fuels.MEMK’S ROLE IN THE OIL SECTORAs a general rule, the MEMK supervises, and is responsible for ensuring the regulation, safety and the qualityof supply of oil and oil products. The relationship between the holder of a license and the MEMK, forthe purpose of strategic reserves is regulated through a contractual agreement. The Government of Kosovocan recommend alternative means to establish a strategic reserve of oil. Currently, licensees holdinga general oil license or an oil storage license are authorized to retain and earmark five percent (5%) of theirstorage capacity as a strategic reserve until the establishment of Kosovan material reserves.FOCUS ON ENERGYRenewable EnergyAs stipulated by the law, MEMK establishes annual targets for the consumption of electricity or heat thathas been specifically generated from renewable energy resources or through the co-generation. Theseindicative targets will be set as a percentage of the entire energy consumption in Kosovo for the followingten years.As further stipulated, the indicative targets shall be accompanied by a report that outlines the measurestaken or that are being planned in order to achieve these indicative targets. Such reports shall take intoaccount the following:

PARTICIPANTS IN THE ENERGY SECTORMINISTRY OF ENERGY AND MININGAs stipulated above, MEMK has the widest authorities stipulated by the Kosovo Energy Law and is responsiblefor the drafting of the Energy Strategy (for a period of 10 years) and the program for the fulfillmentof the Energy Strategy (every three years). MEMK creates the energy policy for Kosovo by working on thefulfillment of the objectives of the long-term and short-term development of the energy sector, creatingthe guidelines for the development of the energy sector and stimulating foreign investments in the fieldof renewable energy and its exploitation.MEMK is divided into three departments: (i) a strategy and development department; (ii) an energy departmentand (iii) a mining department. Every department is responsible for the organization and the developmentof separate energy sectors and the creation of energy policies for different categories of energy.MEMK passes the long term energy budget of Kosovo, which in practice means that MEMK is authorizedto forecast the need for different types of energy and the strategies and the methods of energy supplyover the course of the ten year period.ENERGY REGULATORY OFFICE38As stipulated above, REOK is independent from all other state authorities and energy involved parties.The function of the REOK is not solely for the passing of energy licenses and for the setting tariffs. Withregard to the authorizations provided by the Kosovo Energy Regulator Law and Energy Law, the REOKis charged with making sure that all the energy regulations passed in Kosovo are in accordance with theacquis communautaire.FOCUS ON ENERGYREOK also has supervisory authorizations with respect to the tariffs for the regulation of the energyservices, disputes between parties involved on the energy market, the quality of the energy services andthe energy market standards.INDEPENDENT COMMISSION FOR MINES AND MINERALSKosovo has a separate Mines and Minerals Independent Commission (“MMIC”) which has helped thissector to develop at a greater pace than in the previous years.The MMIC, as an independent body reports directly to the Assembly of the Republic of Kosovo. TheMMIC has extensive powers, including the granting of all mining licenses and permits in the mining andminerals sector. Apart from the supervision of the mines and plants, the MMIC carries out geologicalresource estimations, advises investors on potential areas of interest and provides service orientatedinformation on any relevant items of interest in the mining sector. This helps investors to gain the necessaryinformation for planned investments.MINISTRY FOR TRADE AND INDUSTRY(OIL AND OIL DERIVATES BOARD)The Law on Trade with Oil and Oil Derivates stipulates the existence of separate boards each responsiblefor the organization and the development of the trade with oil and oil derivates (the “OODB”).The OODB is authorized to pass licenses for transport, storage and trade involving oil. The OODB also supervisesthe procedures for the issuance of licenses and is directly answerable to the Kosovo Government.KEKKEK is the sole electricity provider in the Republic of Kosovo. A vertically integrated company, KEK waslegally incorporated at the end of 2005 for coal mining and the generation of electricity and the distribu-

tion and supply of electricity. It is a state owned company. KEK controls all aspects of the energy businessand it owns two open-pit mines, (“Mirash” and “Bardas”), two power plants, (“Kosovo A” and “Kosovo B”),a distribution network covering the total Kosovo territory and a supply division handling the customer andthe energy sales functions. The KEK has approximately 372,000 customers most of which are householdconsumers and employs 7,500 employees.The construction of “Kosovo A” power plant was finalized in 1975 with a capacity of 800 MW. However, theoperational capacity of this power plant is only 420 MW. “Kosovo B” was built in 1984 and contains twounits with a capacity of 339 MW.CURRENT PROJECTSRestructuring of KEKOne of the Kosovo’s Government priorities is the quick and efficient restructuring of KEK in accordancewith the rules of the Energy Community Treaty. The Kosovan Government seeks strategic partners for thisproject. It is planned that KEK be transformed into a market oriented company with separated activitiesregarding the distribution, the supply, the mining and the generation of electricity.Rehabilitation and Construction of Power Plants39Based on a study of the EAR, the Kosovan Government made a plan for the upgrade and rehabilitationof both the power plants Kosovo A and Kosovo B. Construction of a new Kosovo C power plant was alsoplanned. This plan was incorporated into the Energy Strategy, however the investment is significant, andaccordingly, this plan is currently on hold until suitable funds can be arranged for its construction.New Lignite MinesKosovo has the world’s fifth largest accumulation of lignite but this is expected to be exhausted as a resourceby 2015. Accordingly, KEK works on the development of new mine zones such as those in the Sibovcfield, the D Field and the South Field. This project is provided for in the Government’s budget from 2006until 2015. The new mine lines are predicted to have a capacity for 40 years and a total capacity of 3,600MW. According to the Energy Strategy, the new mine will be sufficient for Kosovo’s lignite needs.FOCUS ON ENERGYDistribution NetworkKosovo has the highest technical losses of energy of any distribution network in the region. Kosovo’s Governmentis working on finding strategic partners to rehabilitate the existing network configuration and thedistribution of feeders and transformers.According to recent studies, in order to increase and maintain the quality of electricity supply to the finalconsumers and in order to reduce technical losses, the basic aim of the strategy involves the developmentof a number of new substations. Accordingly, the construction of 110/(20)10kV substations is planned,along with urgently required medium and low voltage network reinforcements.Construction of Natural Gas System NetworkOne of the projects included in the Energy Strategy is the building of a natural gas system for the supply ofnatural gas. The only project currently under preliminary consideration in Southeast Europe is the “Nabucco”gas pipeline supported by the Austrian company “OMV”. This is scheduled to start from Turkey andcontinuing through Bulgaria, Romania and Hungary to reach Vienna. It is envisaged that the natural gas

system network will be developed from Macedonia and will be developed in several stages, covering thewhole Kosovan territory.Environmental Protection DevelopmentAir pollution in Kosovo is high, much of it deriving from lignite, its main energy source. Lignite fires in openpit mines affect rural areas. Lignite burning at Kosovo’s two power plants (Kosovo A and B) has elevated airpollution levels in Pristina and the Kosovo valley, where a large proportion (700,000) of the population isconcentrated. The development of environmental protection is one of the most challenging tasks facingKosovo. The Energy Strategy intends to achieve an indicative positive change in the attitude of the responsibleinstitutions and energy producers regarding environmental protection. Measures that should be takeninto consideration concerning the impact of the electricity sector on the environment are:Renewable Energy Sources40FOCUS ON ENERGYKosovo is working on the promotion of renewable energy sources (“RES”). The strategic idea is the developmentof hydro power through the construction of small hydro power plants, wind energy farms,geothermal facilities, solar power facilities, and the exploitation of biomass and gas from the processingof urban and rural waste. The Energy Strategy aims at creating an appropriate legislative framework and afavourable market for the promotion and development of renewable sources in Kosovo. The goal is to createa friendly environment for private investment in this sector. For the development of small scale hydropower plants, a cadastre of water and hydro power plants will be established. The other priority will be theexpansion of the availability of gas in urban waste land fields, biomass fuel and solar energy systems forwater heating.Licensing for Transport, Storage and Trade with Oil and Oil Derivates (TSTO License)According to the OODB, in order to transport, store and trade oil and oil derivates, an interested partymust hold a License for the Transport and Storage and Trade with Oil and Oil Derivates (“TSTO License”).The TSTO License is issued by the OODB for a period of two years. The TSTO License may be annulled atany time by the OODB in cases stipulated under Kosovan law. The TSTO License is not transferable toother parties.The process to obtain of a TSTO license is as follows:vates;License by the OODB; and

MACEDONIAMakedonija/МакедонијаSKOPJEThe Republic of Macedonia often referred to as Macedonia, is alandlocked country on the Balkan Peninsula in South EasternEurope with a population just over 2 million. The capital is Skopje,with 500,000 inhabitants. Macedonia was granted candidatestatus for joining the European Union in 2005, with the start ofaccession negotiations scheduled for 2010.Experts comment that the climate for energy investments inMacedonia is one of the best in the region; this fact, coupled withthe emphasized need for domestic energy production, makesMacedonia attractive for energy market players.41FOCUS ON ENERGY

ENERGY SECTOR OVERVIEWIntroductionMacedonia imports more than 45% of its energy 1 ; this figure is burdensome, representing a significantproblem for Macedonian energy authorities. The need for new production capacities is something that isdiscussed on a daily basis by the energy experts and by the wider Macedonian public as well.The EU harmonization of the Macedonian legislation process continues during 2010, a year in whichMacedonia is expected to set a commencement date for the negotiations on EU full membership. Also,Macedonia is presiding with the Energy Community since 1 January 2010, holding the second presidencymandate until the end of the year.The climate for investment in Macedonia is one of the best in the region; partly because of the wellestablishedregulatory framework, and also because of the flat taxation policy which has set all profitand personal taxes at a 10% rate. However, there has been a serious lack of investment in new energyproduction facilities.The future of energy in Macedonia will revolve around regulatory amendments and regional cooperation,working towards the improvement and modernization of the sector. Investment in the Macedonianenergy sector is expected to increase in tandem with these changes.Electric Power42OVERVIEWFOCUS ON ENERGYThermal power plants (“TPP”) in Macedonia with an installed capacity of 800 MW produce more than80 % of the domestic energy, equalling 5,000 GW/h of electricity annually. Two of the three existingTPPs, TPP “Oslomej” and TPP “Bitola” are operated by “Macedonian Power Plants” JSC Skopje (“ELEM”)a 100% state owned company. The third power plant is the “Negotino” TPP, with an installed capacityof 210 MW and it is owned by a private foreign consortium.ELEM also operates the 5 most significant hydro power plants (“HPP”) in Macedonia. These are responsiblefor 16% of the total domestic electricity production. The last major investment in this sector wasthe construction of the HPP “Kozjak” which went into operation in 2004 after taking 10 years to build.Since 2004 there have been no new investments in either hydro or thermal power plants. There havebeen initiatives for small HPP projects, resulting in more than 20 concession agreements being signedand the construction of the first plants is expected during this year.The transmission system in Macedonia is connected to Serbia and Greece through 400kV lines. Thereare two 150kV lines to Kosovo which have not been operational since 1999. The Macedonian energysystem operator (“MEPSO”) is a 100% state owned company responsible for the transmission andimportation and exportation of electricity. During the last few years, MEPSO have improved the nationaltransmission grid and the connections to neighbouring countries through investment projects supportedby the EBRD and the World Bank. However, the transmission sector needs further development andthere have been announcements of new investment initiatives.With the unbundling of the distribution from the transmission and production of electricity, Macedoniagot its biggest energy investor through the acquisition of the state distribution company (ESM) by AustrianEVN (“EVN Macedonia”). The deal was closed in 2006, contributing more than 220 million Eurosto the country’s budget. Today, EVN Macedonia is one of the biggest companies, employing over 3,000and additionally investing over 108 million Euros into the distribution network 2 .1 Source: Energy Balance of the Republic of Macedonia for 20092 From EVN Macedonia’s web site: http://www.evn.com.mk

CURRENT PROJECTSIt has been 22 years since the last construction of a TPP in Macedonia. There have been some announcementsof new projects, mostly for the hydro sector. The experts are unanimous that the construction ofnew capacities is an essential need that must be satisfied as soon as possible. TPP projects are not envisagedfor the near future because of the lack of serious strategy regarding the matter and the low energyvalue of the lignite excavated in Macedonia. On the other hand, there are ongoing and future projects inthe hydro energy sector, which are briefly presented below:HPP Chebren and GalishteScope of the project: A concession for the generation of electricity from the HPP’s “Chebren” and “Galishte”,both located on the Crna River will be granted. Subject to this public appeal is a public venturefor the execution of an investment project for the construction of two new hydro power plants and themanagement of the existing HPP “Tikvesh” by the concessionaire and ELEM, pursuant to the tenderdocumentation.Investment value: total of approx. EUR 539 millionStatus: The Government of Macedonia (the “Government”) signed a consultation agreement with theInternational Financial Corporation (“IFC”). The IFC services should improve the feasibility of the project,satisfying certain fundamental conditions that investors would expect in order for them to be interestedin this project. The bid call was closed on 15 October 2009. Companies interested in participatingin the biding were:43RWE - Germany & HSE - Slovenia (Joint Venture)VERBUND - AustriaENEL SpA - ItalyVardar Valley ProjectScope of the project: This project envisages the construction of 12 HPPs, all situated on the biggest riverin Macedonia, the Vardar. The total installed power is planned to be approximately 325 MW. The MacedonianMinistry of Economy (“MoE”) issued a memorandum on the project, stating the basic characteristicsof each HPP and detailing the environmental and climate circumstances of the Vardar basin.FOCUS ON ENERGYInvestment value: Since the project is in its first phase of planning, this information is unavailable at themoment.Status: The Government announced pre-qualification procedures for participants regarding the projectsin both 2008 and 2009. The whole project is still in preliminary-design stage although there are moredeveloped plans for the two biggest HPPs, “Gradec” and “Veles”3.HPP Boshkov MostScope of the project: A concession for the building, operating, and transfer of HPP “Boshkov Most”.The location for HPP “Boshkov Most” is located in the western part of Macedonia, close to the town ofDebar.Investment value: EUR 70 million3 In accordance with the informative memorandum on the Vardar Valley Project, issued by the MoE

Status: The procedure for the granting of a concession was put on hold following an announcement bythe MoE on 24 September 2009. Only one bidder had submitted the concession documentation underthe given preconditions of the project. It is likely that in the coming period, the MoE will amend thesepreconditions in order to attract more potential investors to participate in the bid.Small HPP ProjectThe Government’s small hydro plants project continues in 2010 with the approval of 5 new concessionagreements for the development of such plants. According to the agreements, 5 new small plantsare planned to be erected at locations in Macedonia, with a total annual power production of 13.37GWh. The Minister for the Economy, Fatmir Besimi declared that the investments should not be seenas investments only, but as long-term solutions of the state’s increasing need for new and clean energysources.A study 4 on the development of small hydro plants envisages the establishment of as many as 400 plantsthroughout the territory of Macedonia. The total installed power of these plants is estimated to be in theregion of 250 MW and the expected annual production is set at approximately 1,200 GWh. The MoEhas signed 28 concession agreements so far, all of which are based on the DBOT model (Design, Build,Operate and Transfer). The statement of the MoE says that the preparations for an international publicannouncement on 36 new locations with a total installed capacity of 20 MW have already started.44The Government announced a public call on 15 February 2010 to attract bids for the granting of a waterconcession regarding the generation of electric energy from 36 small hydro power plants (each with anindividual installed power production capacity of 5 MW). They are to be built and operated on the riverbasins Vardar, Strumica and Crn Drim. The deadline for the return of the completed tender documentationwas the 15 March 2010 5 .FOCUS ON ENERGY4 Study performed by the Skopje University in 1981 in order to identify possible sites for the development of small hydro power plants.5 Source: Public Call for collecting bids for the granting of water concession for electric energy generation from 36 small hydro power plants, publishedon 15 February 2010 by the Ministry of Economy of RM.

Natural GasDEVELOPMENT PRIORITIESThe natural gas market in Macedonia is seriously underdeveloped. The only major investment tookplace 13 years ago with the establishment of a 98km long gas pipe line from the Bulgarian border to thecapital of Macedonia, Skopje. The gas network is covering only the area around Skopje and is serving ahandful of industrial locations. The necessity of natural gas and the geographic position of the countryhas resulted in plans for the construction of new pipelines, towards Albania and Italy. Another projectenvisages a gas pipeline, transporting gas from Turkey through Macedonia to the northern Balkans.The Government and Makpetrol a.d. 1 jointly own the market operator in the country JCS “GA MA”. GAMA also operates the national gas network and is the most important company in the market 2 . The EnergyRegulatory Commission of Macedonia (“ERC”) 3 sets the retail and supply gas prices and generallyregulates the sector through various by-laws and pricing decisions. The earlier mentioned TPP “Negotino”(210 MW) is planned to be converted from a heavy fuel (mazute) to a plant using natural gas as thefuel of choice for the production of its electricity. Bearing all this in mind, Macedonia over the next fewyears will become significantly more gas-dependant than it is today.PROJECTSThe first private investment in electricity production in Macedonia, the combined heat and power plant(“CHP”) “TE TO” in Skopje, is planned to start production in 2010. The CHP plant will use natural gas toproduce more than 1,800 GWh of electricity and over 350 GWh of thermal energy. Investors in the 137million Euro project are the Russian company “Sintez” (80%) and the Macedonian heat supplier “Toplifikacijaa.d. Skopje”. This CHP, together with other smaller CHP plants starting operation in 2010, shallincrease gas imports by 268% in comparison with 2009 4 .45ELEM is also planning investments in CHP plants, in order to utilize the relatively low gas prices and totake advantage of the minimal environmental impact of these types of facilities by locating them inurban or semi-urban areas. 5In Skopje, the gas cogeneration plant “Kogel Sever” started test production on 19 May 2009. However,it will not become fully operational, i.e. connected to the energy system of Macedonia, until mid 2010.The installed capacity of the plant is 30 MW. It is expected to produce approximately 150 to 220 GWhelectricity annually, and 30 to 70 GWh heat and technical steam. 6FOCUS ON ENERGYThe Prime Minister of Macedonia, Nikola Gruevski, and the director of ELEM, Vlatko Čingoski, officiallycommissioned the first state cogeneration power plant, named “Energetika”, on the 15 February 2010.The cogeneration power plant will produce both electrical and thermal energy. It is expected to have anannual production of up to 160 GWh of electricity. It has the potential to produce up to 200 GWh ofthermal energy. Natural gas will be used as the operating fuel.OilDEVELOPMENT PRIORITIES/PROJECTSMacedonia has no domestic oil reserves or crude oil production so the country is totally import-dependent.The geo-strategic position of Macedonia, as a natural junction of the west and east is not beingproperly utilized considering the oil infrastructure that has been constructed so far. There have been1 Read more on Makpetrol a.d. in the “Participants” part2 More on GA MA in the “Participants” part3 More on ERC in the “participants” part4 Source: Energy Balance of the Republic of Macedonia for 20095 Source: ELEM6 Source: MoE

many announcements regarding oil pipeline projects (AMBO, east-west corridor, south-north corridor),but so far the only pipeline in Macedonia is the Thessaloniki – Skopje pipeline, built by “Hellenic Petroleum”in the late 1990s’. Since 1999, the Greek national company also owns the only refinery in thecountry (“Okta a.d.”). 7Regarding the oil product market, “Okta a.d.” is the only domestic producer. The 28-year-old refineryis using old technology and this impacts heavily on the surrounding environment. In the near future,the refinery will have to be modernized, especially with regards to its compliance with environmentalregulations.Russian “Lukoil” has entered the market recently, and currently operates 10 modern outlets. The companyintends to open another 30 during the next couple of years, becoming the most significant competitorin the supply of domestic oil products (competing with both “Okta a.d.” and “Makpetrol” a.d.).There have been no announcements of new projects, but projects on pipeline corridors that route troughMacedonia will remain as a strategic objective for the future. As the transportation infrastructure isunderdeveloped (particularly the railways to Serbia and Bulgaria), this is further limiting the possibilitiesfor the development of the region.Coal46Coal mining is essential to the country’s energy security seeing as coal is the primary fuel for electricityproduction in Macedonia. Two open-pit mines “Suvodol” and “Brod-Gneotino” are providing fuel for over98% of the domestic TPP electricity production. The state electricity producer ELEM operates the minesthat supply the “Bitola” and “Oslomej” TPPs, with up to 8 Mt of lignite per year. The feasibility studiesconducted over the last 10 years show that there are possibilities for new lignite mining, and accordingto ELEM, there are plans to open new mines in the region of Mariovo in central Macedonia. This project,currently only in its preparation stage, also envisages a TPP with an installed capacity of 300 MW.FOCUS ON ENERGYInvestments in the sector are both expected and very important, considering the significance of the coalfor the domestic electricity generation. Currently, the “Bitola” TPP’s mine “Suvodol” is using the last ofits reserves. Together with the production of the other lignite mine “Brod-Gneotino” (which is estimatedto be producing 2 Mt per year), the total coal production is only sufficient to serve the TPPs until 2025.This fact is concerning and should either result in immediate plans for projects with new capacities orin significant changes regarding the energy strategies for the future of Macedonia’s domestic electricityproduction.District Heating SystemThere are five district heating (“DH”) systems in Macedonia, 3 of which are in the capital Skopje, withone each in the towns of Bitola and Makedonska Kamenica. The major DH system in Skopje is ownedand operated by JSC “Toplifikacija a.d.” 8 with approximately 40,000 households served. Production capacities(560 MW installed power) 9 are fuelled by heavy fuel (mazute) and to a lesser extent by naturalgas. The other 4 systems are significantly smaller, together serving fewer households than the Skopje DHmain system. The ERC presents the DH prices and regulates the market in general.The domestic company “Toplifikacija a.d.”, together with the Russian company “Sintez” invested in theEUR 137 million CHP plant project (referred to in the Natural Gas section above). This plant is going tochange the fact that all DH systems to date are using inefficient heat-only boiler technology. The newcombined plant will produce 350 GWh of thermal energy and is supposed to set the CHP facility as amodel for the future development of the subsector.7 Read more on “Okta a.d.” in the “Participants” part8 Toplifikacija a.d.from Skopje is private company, controlled by Slovenian group9 Toplifikacija a.d.’s web site: http://toplif.com.mk/home.htm

Renewable EnergyIn Macedonia, approximately 10% of the total energy supply is produced using renewable energy sources(“RES”). This share is close to the EU average 10 , but when we analyze the structure of the renewableresources, we see that it is predominately in the wood fuel and major HPP areas. The use of wind, solarand geothermal energy is insignificant in the current big picture. This fact, combined with the effortsof the Government and the various international partner institutions for clear and investment-friendlylegislation, suggests that RES energy projects should be expected in the near future.Currently, the Government is granting concessions through public tender procedures for some 400 locationsthroughout the country for small hydro plants, with a maximum installed power up to 10 MW. Thetotal installed capacity of all the envisaged plants is estimated at 250 MW.47Besides the hydro power potentials, Macedonia has some of the best environmental conditions in theregion for the production of electricity using solar energy. In addition, the feed-in tariffs 11 for certifiedRES producers are regarded as being very competitive by the experts, enabling the investors to easilycalculate and foresee the financial outcomes of the planned projects.Wind farm projects have also been announced, for the towns of Sv. Nikole and Shtip in the eastern partof Macedonia. Investors are showing interest in the development of wind farms with total project valuesto date of over EUR 700 million. 12Regarding the country’s policy on RES, the Macedonian energy law prescribes that the Government shouldprepare and adopt a “Strategy for Renewable Energy Sources”. Such a strategy is currently being developedby the MoE and should define the clear goals in the use of the RES, assess the potential in this area and helpexperts and investors in clearly seeing the Government’s long term plan for the subsector’s future.FOCUS ON ENERGYNuclear EnergyThe circumstances in the energy markets in the region and the prospects regarding future energy resourceshave compelled politicians and energy experts to discuss the possibilities of constructing a nuclear plant inMacedonia. The alternative idea is a joint investment with some of the neighbouring countries, resulting ina nuclear plant settled elsewhere and partly owned by the country. Unofficially, the reason why the publicdebate on the draft of the Strategy on the Development of the Macedonian Energy Sector (the “Strategy”)is currently on hold is due to the fact that amendments are being made to part of the nuclear energysection. The Macedonian Minister for Economy who is in charge for the energy policy of the country, alongwith high ranking Macedonian officials, have been negotiating with Bulgaria on the subject of their nuclearplant project “Belene” 13 . Other potential projects have been mentioned, such as project “Mariovo” whichenvisages the construction of nuclear plant on Macedonian soil.10 In 2007, the share of renewable energy in final energy consumption (with normalised hydro) in the EU-27 was 10.0 %, Source: European EnvironmentAgency11 Read more on feed-in tariffs and RES regulative in the “Regulatory Framework” part12 Source: Energetika.net – energy news portal, Dnevnik - Macedonian daily newspaper13 Bulgarian nuclear plant in construction near the town of Belene in Northern Bulgaria with total investment value of EUR 7 billion and plannedinstalled capacity of 2000 MW.

48FOCUS ON ENERGYPARTICIPANTS IN THE ENERGY SECTORRegulatory BodiesMINISTRY OF ECONOMYThe MoE, through its’ Department for Energy, is the most important state body and is responsible for energypolicy and the overall control of the energy sector in Macedonia. It has 4 distinct units covering theareas of fossil fuels, electricity, investments and renewable resources and energy efficiency. Besides thepreparation and enactment of laws and by-laws, the MoE is authorized to govern the reforms and the applicationof the strategies for the development of the energy sector. The MoE issues various authorizationsand permits, enacts annual energy balances and cooperates with international and domestic administrationbodies.ENERGY REGULATORY COMMISSIONThe ERC is a regulatory body which is independent from the interests of the energy industry and governmentalbodies. The ERC was established in 2002 and it is composed of five Commissioners appointed bythe Parliament of Macedonia. The main competences of the ERC are to ensure: (i) the safe, secure, continualand quality energy supply to the final consumers, (ii) the protection of the environment and nature, (iii) theprotection of consumers and (iv) the promotion and protection of a competitive energy market based uponthe principles of objectivity, transparency and non-discrimination 1 . The ERC’s most important function isissuing, amending and revoking energy licenses and the regulation of the prices and tariff systems for differenttypes of energy.1 Source: ERC’s web-site: www.erc.org.mk

ENERGY AGENCYThe Energy Agency was founded in 2005 by the law on the Energy Agency as an institution responsiblefor the implementation and promotion of the policies of energy efficiency and renewable energy sources.The agency’s work is financially supported by the “World Bank” and other international funders. Its mainactivities include:ableenergy sources;Public EnterprisesTHE MACEDONIAN TRANSMISSION SYSTEM OPERATORMEPSO is the second company that was established with the ESM division in 2005 as a JSC. It is 100%owned by the state, representing a non-profit oriented public service. The main activities of MEPSO are(i) the transmission of electricity, (ii) the operating the electricity market and (iii) the management of thepower system in Macedonia. For these purposes, MEPSO holds three licenses issued by the ERC for the perioduntil 2040. For its services, MEPSO charges transmission tariffs which are set by the ERC in accordancewith MEPSO’s costs. There are 400 employees operating over 2,200 Km of transmission grid lines, and 73substations with 148 transformers with a total installed power of 6,417 MVA. 249ELEMThe state-owned joint stock company ELEM, (mentioned earlier), is one of the three electricity companiesthat emerged from the former Electricity Industry of Macedonia (“ESM”). The ESM was divided in 2005, inorder to be partially privatized (the distribution sector). ELEM is the largest energy company in Macedoniaemploying 3,800 and producing more than 95% of the total domestic energy. ELEM controls two TPPs,“Bitola” and “Oslomej” has a total capacity of 800 MW and has five HPP’s with a total installed capacity of530 MW. In the most recent energy outlook for 2010, it is envisaged that ELEM’s capacities should producetotal energy amounting to more than 6,000 GWh. 3 It is important to mention that energy experts, EnergyCommunity representatives and the EU have each pointed out the monopoly position of ELEM, asking forlegislative intervention. Bearing this in mind, it is very likely that the planned amendments of the Macedonianenergy law in 2010 will mean new, stricter regulation for ELEM and a more transparent wholesaleelectricity market.FOCUS ON ENERGYGA MA“GA MA” is the national operator of the natural gas network. The company originally started developingas a part of the “Makpetrol a.d.” and it was formally established in 2006 as a jointly owned joint stockcompany between Government and “Makpetrol a.d.” 4 The company operates and manages the natural gastransmission system and third-party access. “GA MA” complies with the domestic energy law regardingits operations and is especially dependent on the decisions and other legislation enacted by the ERC. “GAMA” is holding the license for the management of the transmission system and a license for natural gas,also issued by the ERC.2 MEPSO data, www.mepso.com.mk3 Macedonian Energy Balance for 2010, enacted 29.12.20094 The Government controls the company, Makpetrol owns much smaller share.

Private ShareholdersEVN MACEDONIAAs part of the “EVN Austria” group, EVN Macedonia operates the distribution and electrical supply systemin the state. In 2005, “EVN Austria” bought 90% of the ESM distribution company for approximately EUR220 million and today it jointly owns it with the MEPSO (10%). With more than 3,000 employees and asupply of over 5,000 GWh of electricity, EVN Macedonia reached a turnover of approximately EUR 300Million in 2008 5 and stands as one of the biggest and most successful companies in Macedonia. Aside fromthe distribution and supply, EVN Macedonia owns and operates 11 smaller hydro plants with an installedpower of over 40 MW. In the past two years, the Government and EVN Macedonia disagreed over billingpolicy. The state-owned producer ELEM claims that EVN Macedonia has debts of over EUR 100 Million.The relations between the Austrian-owned distributor and the Government have improved in 2009, butthe dispute is still unresolved. In addition to this, the price of the supplied electricity is strictly regulated bythe ERC, dictating a low supply price regardless of the real costs incurred by the distributors. So-called “costreflective pricing” will most likely feature in the amendments to the Macedonian energy law scheduled forthis year.OKTA A.D.50FOCUS ON ENERGYThe only oil refinery in Macedonia is operated by the JSC ”Okta a.d.”, a company owned by the Greekgroup Hellenic Petroleum with an 81% majority shareholding (“OKTA”). Built during the early 1980’s usingSoviet technology, the facility is operating with higher costs and relatively low efficiency. This is havinga big impact on the environment. The scope of the company includes the refining of crude oil as well as theimport and trade of petroleum products. The refinery has an annual refining capacity of 2.5 million metrictons. The main products produced are liquid petroleum gas, leaded and unleaded gasoline, aircraft fuels,diesel fuel, heating oil and heavy fuel oil. The products of the company cover the largest part of the internalmarket and significant quantities are exported to Kosovo. The company also operates a network of 36outlets 6 . In 2008, OKTA was the biggest company in Macedonia with an annual turnover of over EUR 650Million. Currently, the company is being modernized, mainly as a result of the energy regulators increasingthe pressure on them to mitigate their impact on the environment and also due to an increased demandamongst consumers for a higher quality fuel product.MAKPETROL A.D.“Makpetrol a.d.” is the biggest company in Macedonia regarding the distribution and supply of oil products.It has been operating since 1947. The company, through its network of over 110 petrol stations and 12 oilproduct storage facilities, has established a significant infrastructure for the distribution and trade of oilproducts. Having over 1,900 employees and a 60% market share, “Makpetrol a.d.” was amongst the twolargest companies in Macedonia in 2008, with revenues of nearly EUR 400 Million. In 1996, the Governmentand “Makpetrol a.d.” jointly established the public company ”GA MA”, the current natural gas market operatorin Macedonia. Also, “Makpetrol a.d.” is the major importer and supplier of natural gas in the country.REGULATORY FRAMEWORKThe Umbrella LawThe energy sector in Macedonia is regulated by the so-called “umbrella” law, covering different areas ofenergy such as electricity, renewables, oil, gas, as well as the regulation of the markets, transport and thetransmission of energy. This is the Law on Energy, enacted in May 2006 and published in the Official Gazetteof Macedonia no. 63/2006 (the “Energy Law”). It has been amended twice, once in 2007 and more recentlywith the amendments of 2008.5 Euro business center, Skopje – publication “200 biggest companies in Macedonia”6 “Hellenic Petroleum” Data, http://www.hellenic-petroleum.gr/online/index.aspx

Besides the regulation of the electricity, gas, oil and geothermal energy markets, the Energy Law also setsthe goals of the energy policies, defines energy activities and promotes energy efficiency and renewableenergy. The energy activities that can be performed under the Energy law fall under 26 specific descriptions,such as the:Furthermore, the Energy Law sets the Government as the energy policy maker, through the preparation andenactment of the Strategy. This national document, that is supposed to initially cover the period 2010-2020with a longer term vision until 2030, is to be enacted this year. On the other hand, the Energy Law establishesthe ERC as the independent body regulating the energy markets, especially in the determination ofpre-set prices and tariffs, the enacting of various by-laws, the issuing of permits and the issuing of licensesregarding energy activities and the monitoring of the energy sector in general.LicensesIn order to be able to perform energy activities in Macedonia, it is necessary to acquire an energy licenseissued by the ERC. Energy licenses are issued for a period of between 3 to 35 years, depending on the activity,the period of time for the use of the energy goods (e.g. concession agreement), as well as the submittedrequest of the energy activity performer. It is important to mention that the energy licenses, when granted,cannot be transferred to another person or entity.51Regarding the energy licenses, the ERC adopted the Rulebook on the Conditions, Method and Procedure onIssuing, Altering, Extending and Withdrawing Energy Activity Licenses (“Licenses Rulebook”). Applicants areobliged, along with the license application, to issue a letter of intent, a declaration on the reliability of theapplication and the data provided, and to submit a substantial number of documents.The ERC is obliged to issue an energy license within 90 days of the receipt of an application, once all thepreconditions are met. Finally, no energy license is required for the following energy activities:distribution systems;with biofuels;with biofuels, in road or railway tanks or by other transportation means.FOCUS ON ENERGYConstruction of Energy FacilitiesAccording to the Energy Law, domestic and foreign investors can build new power plants with an installedpower capacity of more than 1 MW for the production of electricity, heat and the combined production ofelectricity and heat, only when they are holding an authorization that has been issued by the Government.However, if the performing of the energy activity is conditioned by the requirement of a concession, thepreconditions for the construction of such a power plant are arranged through the concession agreementand no subsequent authorization is required. Also, if the installed power of the PP to be constructed is under1 MW, there is no requirement for Governmental authorization. The submitted documentation, complete

and valid under the law, is considered by the Government for a maximum 30 days from the date of submission.At a proposal by the MoE, the Government enacts a decision regarding the authorization for theconstruction of a new power production plant.The very construction of power plants is regulated under the Law on Construction, published in the OfficialGazette of Macedonia no. 130/2009 (the “Construction Law”), dividing various energy constructions inthree different categories, presented in the table below.FIRST CATEGORYNuclear PP, thermal and hydro PP with an installed capacity over 10MW, power transmission lineswith voltagelevel over 110kV, oil pipelines, product pipelines, major gas pipelinesSECOND CATEGORYThermal and hydro PP with an installed capacity between 1 and 10MW, constructions for powerproduction using renewable resources with an installed capacity over 1MW, power transmission lineswith voltagelevel between 35 and 110kV, transformer substations over 35kV, municipality main gasnetworks, constructions with energy production capacities52THIRD CATEGORYThermal and hydro PP with an installed capacity up to 1MW, with wind turbines, constructions forthe production of electricity using renewable resources with an installed capacity up to 1MW, powertransmission lines with voltage level between 10 and 35kVFOCUS ON ENERGYThe constructions listed in the first and second categories are treated as being in the public interest. TheMinistry of Environment and Physical Planning of Macedonia (“MoEPP”) is authorized to issue all requiredpermits regarding the construction of the mentioned structures. The third category of structures are locallymanaged under the Construction Law. Accordingly, building permits are issued by the local self-governments.Oil and gasRegarding oil and gas regulatory rules, the Energy Law prescribes the different energy activities that entitiescan perform (presented in the table below). These provisions of the Energy Law also prescribe the obligationsand authorizations of the performers of such activities.

GAS ENERGY ACTIVITIESOIL ENERGY ACTIVITIES*natural gas transmission*natural gas transmission system operation;*natural gas distribution;*natural gas distribution system operation;*natural gas supply for tariff consumers connectedto the natural gas transmission system;*natural gas supply for captive consumers connectedto the natural gas distribution system;transit of natural gas and*natural gas trading, ancillary services fornatural gas.*oil and oil derivates transportation via pipelines,i.e., product pipelines;*oil processing and oil derivates production;*oil and/or oil derivates storage, as well as thestorage of biofuels and blends of liquid fossil fuelsused transport with biofuels;*transit of oil or derivates, and*trading with oil derivates, biofuels and blends ofliquid fossil fuels used for transport, with biofuels.The ERC is the authorized body for the issuing of licenses, grid rules and for price monitoring and pricedetermination in the oil and gas sectors. This is done through the issuing of by-laws. Such an example isthe “Rulebook on the Method of Price Regulation for Natural Gas Transmission, Distribution and Supply”,which was published in December 2009. Under this rulebook, the ERC is authorized to determine theprices for natural gas.The “Rulebook for the Conditions, Method and Procedure for Obtaining and Terminating Eligible ConsumerStatus for Natural Gas”, also enacted by the ERC, regulates the procedures and required documentation forthe acquiring of the status of an eligible consumer of natural gas.53With regard to oil, the Energy law prescribes the obligations and general regulation of the entities performingoil energy activities into three groups: (i) transit of crude oil and/or oil derivatives, (ii) wholesale of oilderivatives and (iii) retail of oil derivatives. The capped prices of the refinery and retail prices for the oilderivatives are set by the ERC, according to enacted by-laws on the matter 7 .Renewable EnergyEnergy produced from RES is regulated under the Energy Law in terms of the strategic tendencies andobligations undertaken with the Energy Community Treaty. A strategy on renewable energy has not beendeveloped yet, although the Energy Law provisions dedicated to renewable energy relies on the existenceof such a strategic document. Renewable energy is further regulated with the Rulebook on RenewableRecourses for the Production of Electricity, published in the Official Gazette of Macedonia no. 127/2008(the “RES Rulebook”). Besides the general rules regarding renewable energy facilities, the RES Rulebookdetermines the different types of renewable recourses facilities for:FOCUS ON ENERGYThe Energy Agency of Macedonia (the “Energy Agency”) is the policy maker in this area, together withthe Government. Besides policy making, the Energy Agency issues guaranties for the origin of electricityproduced using renewable sources. These guaranties are issued in the form of a certificate, which enablesthe producer of energy to qualify as a privileged producer. Holding such certificates enables the RES-usingproducers to benefit from privileged (feed-in) tariffs 8 .7 The ERC enacts decisions on price of the oil and oil derivatives on regular basis. In 2009, 27 different decisions were enacted, correcting the prices inreflection of the crude oil prices in the international markets.8 Feed-in or privileged tariff is a policy mechanism designed to encourage the adoption of renewable energy sources. It typically includes three key

The ERC established the feed-in tariffs for electricity offered on the market by the privileged producers. Atthe moment, the Government offers long-term contracts for the buyout of such electricity for a period of20 years. However, the ERC reassesses feed-in tariffs and the time frame of the buyout agreements everythree years and is entitled to amend such agreements.Every category of renewable energy has specific feed-in tariffs:and 12 EUR cents/KWh, depending on the annual production;Energy TradeAs in the other areas of energy mentioned, the Energy Law regulates the energy trade only relating to thedefinitions and general rights and obligations of the participants.54The provisions of the Energy Law are generally in accordance with the Energy Community Treaty and since2008 all non-household customers can acquire privileged status as long as certain preconditions regardingconsumption are met. In accordance with the relevant EU Directive 9 on internal electricity markets, all customers,including households, should have the opportunity to choose their electricity supplier from 2015.FOCUS ON ENERGYThe ERC is the regulator of the markets through prescribing tariffs, rendering decisions and issuing otherregulations on the pricing of energy in Macedonia. Price decisions on electricity production, on transmissionand distribution and on the highest allowed tariffs are also established by the ERC. Also, the oil price ceilingfor suppliers and traders, as well as gas tariffs regarding national grid consumers are determined by theCommission, using its own rules and other by-laws on pricing methodology. The ERC also sets the feed-intariffs for the privileged producers of electricity that are using renewable resources for production.Other interesting limitations under the License Rulebook are that only one entity can be issued an energylicense for a specific area of Macedonia and on the territory or part of the territory of a particular municipality,regarding:These provisions are somewhat contrary to the purpose of the Energy Community, so it is expected thatthese will be amended with the changes of the Energy Law in 2010 10 .provisions: 1) guaranteed grid access, 2) long-term contracts for the electricity produced, and 3) purchase prices that are methodologically based onthe cost of renewable energy generation. (Source: Mendonça, M. (2007) Feed-in Tariffs: Accelerating the Deployment of Renewable Energy. (London:EarthScan)9 Directive 2003/54/EC of the European Parliament and of the Council of 26 June 2003 concerning common rules for the internal market in electricity10 The Energy Community representatives already pointed out on the disadvantages of the Energy Law, especially regarding the competition issues.

NEWS ARTICLEMACEDONIANGOVERNMENTDRAFTING NEW ENERGY LAWAuthor: Milan Nedelkovski, SkopjeSource: Energetika.NETRegional Energy Newswww.energetika.net/seeUntil the end of the following year,2010, the Macedonian governmentis to adopt a new EnergyLaw that will be in compliancewith European standards. TheMinister of Economy, Fatmir Besimi,announced that the new lawwould cancel out the unfavourableremarks received from the European Energy Community.“The Republic of Macedonia is giving a clear signalthat is stepping forward with the reforms in the energysector, for further compliance with EU directives,” Besimisaid.The Energy Community South East Europe Treaty,which has its headquarters in Vienna and is supportedby the European Union, criticised Macedonia concerningthe country’s energy sector reforms, placing particularstress on the decreasing market liberalisation andthe un-equal treatment of companies operating in theenergy sphere, and the favouring of the services of MacedonianPower Plants (ELEM) over the Austrian distributorof electricity EVN.“Principles for the price of energy and principles that referto the equal treatment for all companies have beendiscussed. So, all these aspects have been foreseen withinthe law and the bylaws,” said Besimi.The adopted action plan by the government foreseesadopting the Draft New Energy Law until the end of thisyear. Public discussion will follow. The Energy Law is expectedto become effective from 2011, and until then allprocedures for adopting the bylaws are expected to befinished. German RWE remains interested in buildinghydropower plants in MacedoniaAfter several unsuccessful tender procedures for BoškovMost, Vardarska Dolina, Čebren and Galište, foreign companiesare still interested in investing in the undevelopedenergy sector in Macedonia. The German RWE statedthat it could again bid for Čebren and Galište, but that itwould first go through the terms of the new tender procedureand then would need to calculate the economicjustifications of the investment.RWE management pointed out that the company wouldnot give up its intention to invest in building the two hydroelectricpower plants Čebren and Galište, with capacitiesworth about 500 million euro.“We are gathering the documents for the tender. Now,we should consider the option to participate, but we stillhave not taken a decision; we are still analysing the situation,”an RWE representative said.The dispute between ELEM and EVN may influence thedecision of RWE of whether to invest in Macedonia.“As every foreign investor, we will also closely observethe EVN-ELEM process. I cannot say whether that willhave negative or positive consequences, but I hope thatthis process will come to an end soon,” the RWE representativesaid.55FOCUS ON ENERGY

BOSNIA ANDHERZEGOVINABosna i Hercegovina/Босна и ХерцеговинаBANJA LUKABosnia and Herzegovina consists of the Federation ofBosnia and Herzegovina and the Republic of Srpska. Ithas a population of over 4.6 million people. This countryhas experienced steady economical growth since the mid1990’s when the civil war ended. The country has enormousenergy potential, especially in the area of hydro energy; it isthe only country in the region that it is able to fully satisfy itselectricity demands by domestic production. Furthermore,it is exporting energy to its neighbours.SARAJEVO56BIH ENERGY SECTOR OVERVIEWIntroductionFOCUS ON ENERGYIn brief, Bosnia and Herzegovina (“BIH”) has several levels of political structuring under the overall federalgovernment level. The most important of these levels is the division of the country into two entities, thesebeing the Republic of Srpska (“RS”) and the Federation of Bosnia and Herzegovina (“FBIH”). In additionto these, the Brčko district in the north of the country was created in 2000 out of land provided by bothentities. It officially belongs to both entities, but is governed by neither of them, and functions under adecentralized system of local government.The energy sector in BIH essentially reflects the constitutional organization of the country. This means thatthe legal framework for the sector has been fragmented on several levels between the state and the separateentities. Therefore it is not as straight forward as some of its neighbouring Balkan jurisdictions.Energy has been recognized as one of the most valuable assets that BIH owns. Although there were no majorinvestments in new production facilities over the past twenty years, lately all levels of governance havemade the increasing of energy production a real priority. There has been a declaration by key stakeholdersthat electricity will be one of the major goods that BIH will export.Currently, the majority of the energy infrastructure is operated by state owned companies, although someof them are listed on the domestic stock market. Lately, there has been an increase in investment in theelectricity sector.The Parliaments of both entities have adopted respective electricity laws regulating the respective entities’competences in the fields of electricity’s production, distribution, supply and trade. The legislation alsoentitles the respective regulators to issue and revoke licenses for commercial activities in the electricitymarket. Both entities have similar rules governing electricity whereas for oil and gas there are certain differencesprimarily related to the fact that the RS has adopted new laws on energy, oil and gas 1 .1 The Law on Energy (Official Gazette of the Republic of Srpska no. 49/09), The Law on Oil and Oil Derivatives (Official Gazette of the Republic ofSrpska no. 36/09), The Law on Gas (Official Gazette of the Republic of Srpska no. 86/07)

BiH fully satisfies its demands for Electric Power consumption and also exports electric power. The exportof Electric Power accounts for 8.1% of BiH’s total exports. Energy production capacities are not fully exploitedand there is great potential for new power plants that would significantly increase production. Inorder to illustrate the potential for production it is worth noting that the hydro potential of RS is 10,027.5GWh/per year, but only 2,985.8 of this has been utilised, whilst 7,041.7 GWh/per year is still availablefor utilisation. The total estimated hydro potential in BIH is estimated to be somewhere in the region of23,395 GWh/per year 2 .The governments of both entities in BIH declared strong support for investments in the sector with themain focus on new production facilities, the improvement of existing facilities and energy efficiency.Electric PowerOVERVIEWThis area has under taken significant reforms of late. These reforms include the adoption of new primaryand secondary legislation 3 as well as the establishment of new institutions. The underlying aims of thereforms were to harmonize the energy sector in BIH with that of the European standards, especially withregards to the opening up of the energy market.Activities such as (i) the production of electric energy and the supply to buyers connected to the transmissionor distribution grids that are authorized to buy electricity through their own choice (“Qualified Buyers”)as well as (ii) the production of electric energy from producers not involved in the transmission anddistribution of electric energy in the area where they operate for further sale (“Independent Producers”)are performed in accordance with market principles that provide that parties are free to agree the termsand conditions of their agreements.57Alternatively, activities such as the production and trade of electric energy for buyers with whom the tradeof electricity is performed in accordance with regulated criteria and under regulated tariffs (“Non-QualifiedBuyers”) is performed under controlled terms and conditions. However, in such an instance, authoritiesmay impose that an investor be required, to a certain extent, to provide and trade electricity in the bestinterests of the public. This is a risk for an investor that only wants to supply Qualified Buyers that operateunder regulated tariffs. Accordingly, it is advisable to regulate this relationship with the competent authoritiesfrom the word go, and to the greatest extent possible, starting with the concession agreement itselfand then further down the road of negotiations and administrative procedures related to the project.The Regulatory Commission for Energy of the RS (“RCERS”) and the Regulatory Commission for Electricityof the FBIH (“RCEFBH”) are cooperating and are interconnected in their competences from a practicalpoint of view with the Independent System Operator in Bosnia and Herzegovina (“ISO BIH”) (www.nosBH.ba) and the Company for the Transmission of Electricity in Bosnia and Herzegovina (“Elektroprenos- Elektroprijenos a.d.”). (www.elprenosBH.ba).FOCUS ON ENERGYDEVELOPMENT PRIORITIES AND PROJECTSEnergy has been recognized as a potentially lucrative resource for BIH’s economy. Accordingly, the governmentand primarily the governments of RS and FBIH have initiated the development of strategies for theenergy sector.The Government of RS has commenced the development of the RS “Energy Development Strategy” that isexpected to be completed this year. The Government of RS has already granted more than 100 concessionsfor small hydro power plants, but most of them are lagging behind with regard to their construction.2 Source: „Distributed production of electric power in BIH“, Author Mr. Vinko Bosnjak3 The Law on Transmission of Electric Power, Regulator and System Operator of BIH (Official Gazette of Bosnia and Herzegovina Nos 7/02, 13/03and 76/09), the Law Establishing the Company for the Transmission of Electric Power in BIH (Official Gazette of BIH Nos. 35/04 i 76/09), The LawEstablishing an Independent System Operator for the Transmission System in BIH (Official Gazette of BIH No. 35/04)

Major projects in Republika Srpska with respect to the building of new facilities are: and new block of TPP “Ugljevik”) 4 ; “Suceska”, “Paunci” and “Foca” where the tender application for investors should be published during2010. This project will be coordinated with the Serbian government 5 ; network of water supply tunnels for the utilization of the hydro capacities; and 6 .In January 2010 the Government of FBIH announced and presented a series of projects named “Prioritiesfor the construction of energy facilities in the FBIH” 7 . Investments in these projects are expected to amountto EUR 5 billion and the Government of FBIH is interested in identifying partners for these investments.The projects listed include:58 8 . “Vinac”, “Han Skela”, “Ugar”, “Vrletna Kosa”, “Ivik”, “Babino Selo”, “Glavaticevo”and “Bjeilimici” 9 . 10 . jna”,and “Poklecani”) 11 .Natural GasOVERVIEWFOCUS ON ENERGYThe gas infrastructure in BIH is not very developed and includes only 191 km of gas pipeline. There are onlytwo urban areas with a gas supply network. Legislation in the two main entities differs as RS has a newlyadopted the Law on Gas while the FBIH still does not have a specific law, but has issued a Decree on GasSector Regulation 12 which is described in greater detail below.GAS / RSUnlike the FBIH, trade in the natural gas sector in the RS is based on the principles of an open and freemarket.Qualified consumers have the right to buy natural gas on the free market without requesting anypermit from the RCERS. There are two types of consumers, qualified and tariff consumers. A qualifiedconsumer is a natural gas consumer that has the right to choose who it will buy the gas from (“QualifiedConsumer”). Qualified Consumers buy natural gas on the free market. Any consumer can have the statusof a Qualified Consumer regardless of whether it is engaged in the transport or distributive network; this isbased on a consumer’s annual gas consumption as specified by the RCERS. All natural gas consumers, savefor households, have had Qualified Consumer status since 1 January 2008. All the natural gas consumerswithin the household category will have the status of Qualified Consumers from 1 January 2015.The purchase of natural gas abroad is permitted in the RS for companies holding the necessary licenses issuedby the RCERS. Natural gas prices are regulated and are publicly available. These prices are determinedby the supplier and based on the methodology and tariff system of the RCERS 13 . Since there has been no4 TPP Stanari (the concession was granted to the Energy Financing Team) should be constructed in next five years and will have installed capacity of410 MW. Installed capacities of new blocks of TPPs Gacko and Ugljevik should be 1320 MW.5 Installed capacity for these HPPs on Uper Drina River is around 250 MW.6 Studies identified 120 potential locations for small HPPs with total installed capacity 340 MW7 Source: http://www.fbihvlada.gov.ba8 Installed capacity for these TPPs is more than 2000 MW9 Installed capacity for these HPPs is 455 MW10 Installed capacity for these small HPPs is 66 MW11 Installed capacity for these WPPs is 270 MW12 The Decree on the organization and regulation of gas sector economy (Official Gazette of the FBIH no. 83/07)13 The Rule on Tariff Methodоlogy in the System of Transport, Distribution, Storage and Supply of Natural Gas (Official Gazzete of the Republic ofSrpska No. 9/09)

domestic source of natural gas, suppliers purchase their natural gas from abroad.In the RS the tariff system is applicable to all consumers of natural gas.GAS / FBIHThe only companies allowed to conduct activities related to the supply of gas to consumers in the FBIH forthe time being are “Energoinvest d.d.” of Sarajevo and “BH Gas d.o.o.” of Sarajevo. The company determinedto operate the gas transportation system in FBIH is BH “Gas d.o.o.” of Sarajevo.The prices for the sale of natural gas to tariff consumers and gas suppliers are regulated by the FBIH Government.On the proposal of the Federal Ministry of Trade and based on an opinion provided from the competentministries which are the FBIH Ministry for Energy and the FBIH Ministry for Mining and Industry. TheFBIH Government determines the gas supply price chargeable by gas suppliers that provide gas for tariffcustomers that are using the energy whilst performing public services in the FBIH 14 . The Company “BH-GAS d.o.o.” regulates the price chargeable for the supply of gas to the remaining tariff consumers. In thecase of any variation IN this price, “BH-Gas d.o.o.” is obliged to notify the competent ministry in writing.The price of natural gas is determined on the basis of the price of oil and oil derivatives on the worldmarket, defined delivery periods, the relations between planned and realized quantities of gas, and theseasonal and daily dynamics surrounding the delivery of gas to tariff consumers, all of which impact onthe price of gas. In the FBIH there are three types of consumers: privileged consumers, tariff consumersand protected consumers:of the annual consumption once it is within the limits of the gas quantities laid out for such use or (ii) afinal consumer that consumed more than 150 million m3 of gas in the previous year.of the above mentioned tariff customers that are performing a public service.partial disruption in the supply of gas or in the event of extremely low weather temperatures. However,this is only the case when there is a lack of any other alternative solution for energy supply.DEVELOPMENT PRIORITIES AND PROJECTSThe main priority for the gas sector in BIH is the development of a gas distribution networks in urban areasand the construction of gas pipelines. Major future projects that have been earmarked are the “Sava” gaspipeline (direction East-West) and the gas pipeline from the Croatian border towards central Bosnia (Brod-Zenica Gas Pipeline). Another project that will be significant in the forthcoming period is the constructionof 80km’s of a primary gas network in Northwest BIH where the European Bank for Reconstruction andDevelopment announced its interest in supporting the development of a gas network in Herzegovina. It isplanned that such a gas network would ultimately be connected with the Croatian pipeline to Split.59FOCUS ON ENERGYOilThe oil derivatives’ market in BIH is mainly dependent on imports from Croatia, Serbia, Montenegro andHungary. The oil refinery in Brod 15 has recently been reconstructed and has started the production of oilderivatives. Prices of oil derivatives are set according to the prevailing market conditions.Current production at the oil refinery in Brod is 1.2 million tons a year, but current activities on the reconstructionand modernization of a second production line would increase the capacity of the refinery to 4.2million tonnes, a figure that should completely satisfy domestic demands for oil derivatives in BiH. Recently,the export of oil derivatives has been made possible via river Sava. Oil derivatives are being exportedto the Black Sea region via this route.14 The Decree on the organization and regulation of gas sector economy (Official Gazette of the FBIH no. 83/07)15 The Oil Refinery Brod was bought in 2007 by the Russian oil company NefteGazInkor (subsidiary of the Zarubezneft).

BIH does not have oil pipelines apart from where the oil refinery in Brod has been connected with the AdriaticPipeline in Croatia.The RS has adopted the Law on Oil and Oil Derivatives 16 that prescribes the main features for the oil sectorin RS when it comes to the production of oil derivatives, market functioning and safe supply.CoalBIH has significant reserves of coal and most of them are used for the production of electric power in TPPs.Major coal mines are Stanari, Ugljevik, Kreka, Banovici, Kakanj, Gacko and Zenica. Reserves of lignite areestimated to be in the region of 3.7 billion tons whilst reserves of brown coal are estimated to be in theregion of 2.2 billion tons.In RS the major coal mines Gacko and Ugljevik are integrated with thermal power plants, whilst Stanari isowned by Energy Financing Team who plan to construct a TPP nearby. In FBIH, seven coal mines, besidesthose already integrated with nearby TPPs, are part of the Elektroprivreda FBIH since 2009.Renewable Energy60The Law on Energy in the RS 17 states that both the exploitation of renewable sources of energy and efficientcogeneration are of equal importance to the RS. This is in order to ensure a reduction in the production ofelectricity from fossil fuel sources. This in turn should reduce the negative impact that energy generationhas on the surrounding environment. This is also an effort to promote the efficient utilization of energyand the development of new technologies. It is also motivated by the need to promote a variety of energysources, to increase energy safety and to decrease the dependency that the RS has on the importation ofenergy in the long term.FOCUS ON ENERGYThe Law on Energy prescribes that the RS Government should adopt a regulation containing measures tostimulate the increase of renewable energy sources and production. It is also envisaged by the RS Law onEnergy that such a regulation should also promote the use of biofuels in fuel consumption attributable tothe transport sector.RCERS shall with the RS Government develop a system of subsidies for the production of renewablesources. The RS Law on Energy also prescribes that producers of electricity from renewable sources canbe granted a certificate of origin certifying that the production facility produces power from renewablesources and with respect to energy efficiency and the protection of the environment.PARTICIPANTS IN THE ENERGY SECTORThe legal framework for the energy sector in BIH is defined firstly, on a state level, mainly through therules on the transmission of electricity, foreign trade and the provisions of the general legal framework forthe sector’s opening. Secondly, it is defined on the entities’ level, containing detailed provisions on howthe energy sector is to be opened up to foreign investment and how the regulation of energy production,distribution, supply and domestic trade is to occur.State LevelOn a state level, the “Law on the Transmission, Regulation and System Operation of Electrical Energy inBIH” 18 established the initial legal framework for the regulation of the electric power sector and the establishmentof an electric power market. In particular, with respect to the electricity transmission system in BIH,this law has organized the establishment and the functioning of the State Electricity Regulatory Commission16 the Law on Oil and Oil Derivatives (Official Gazette of the Republic of Srpska no. 36/09)17 The Law on Energy (Official Gazette of the Republic of Srpska no. 49/09),18 the Law on the Transmission, Regulation and System Operation of Electrical Energy in BIH (Offcial Gazette of Bosnia and Herzegovina Nos. 07/02,13/03 and 76/09)

of BIH (“SERC”), the independent system operator, and the company responsible for the transmission ofelectric energy named “Elektroprenos BH”,It is important to note that:of electricity in BIH and licenses for the trade of foreign electricity as well as to approve and monitorthe application of tariffs and tariff methodologies for transmission. A transmission license, according tothe above law, needs to contain conditions which will allow competing electricity suppliers’ fair accessto the transmission system;is authorized to manage the operation and dispatch of the transmission grid in BIH. It also directs,schedules and coordinates the maintenance, construction and expansion of the grid with the company“Elektroprenos BH”;sponsibilitiesinclude the transmission, maintenance, construction, expansion and management of thetransmission network of BIH. It should be noted that, according to the said law, after the establishmentof “Elektroprenos BH”, no other company can have jurisdiction or authority in such matters; andTrade and Economic Relations of BIH.61FOCUS ON ENERGY

Entity’s levelAs explained, whilst the transmission of electricity and international trade (including the licensing thereof)is principally reserved for the state level, it is the entities that primarily regulate the area of electricity’sproduction, distribution, supply and internal trade, and all activities within the renewable energy, nuclearenergy and oil and gas sectors. Apart from the SERC as the state “umbrella” regulator, both entities havetheir own individual regulators.Regulatory BodiesTHE SERC - THE STATE ELECTRICITY REGULATORY COMMISSIONThe SERC is headed by three commissioners, two of which are appointed from FBIH and one from RS. Ithas jurisdiction over the transmission of electricity, transmission system operations and international tradein electricity, as well as generation, distribution and the supply of electricity customers in Brčko District ofBosnia and Herzegovina. The SERC’s jurisdiction includes:62FOCUS ON ENERGYancewith licenses within its jurisdiction;ancillary services and the operation of the Independent System Operator (ISO), as well as the supplyingof electricity to customers in the Brčko District of Bosnia and Herzegovina;ketrules and the grid code, and the terms and conditions for connection and access to the network;party access to the transmission network;laryservices;including the plans related to the transmission network and the quality of electricity transmission;between demand and supply of electricity;tionand the prevention of anti-competitive activity;State laws;anti-competitive conduct;THE RCERS - THE REGULATORY COMMISSIONFOR ENERGY OF THE REPUBLIC OF SRPSKAThe RCERS is headed by the chairman and four commission members and its competences are - Withinthe electric energy sector:the distribution of energy and the electricity customers including traders of electricity;distribution network and the price for the supply of non-eligible customers with electricity as well asthe methodology for the determination of the fees chargeable for the establishment of a connectionto the distribution network;

non-eligible customers;In the natural gas sector: tribution,storage and supply of natural gas; connection to the network; required for the generation, transport, distribution and storage of natural gas; erssupply; amendment and revocation of licenses for activities as well as the determination of the protocol forthe obtaining, amendment and revocation of licenses relating to activities in the natural gas sector; tributionsystem operators relating to the granting of approvals for the use of the network and thegranting of approvals for the connection to the network; an eligible customer; and the determination of the status and the subsequent registration of eligiblenatural gas customers; terms and conditions decided upon regarding the supply of natural gas; and ralgas supplying.Within the scope of the oil and oil derivates sector:pipeline, and of the cost of the transport of oil derivates though the product pipelines;pipelines respectively;of licenses for activities, the handing down of decisions regarding proceedings, and the revocation oflicenses relating to activities in the oil and oil derivatives sector;tivitiesin the oil and oil derivatives sector, and the settlement of disputes regarding license holders; andantto the Law on oil and oil derivatives and the principles stipulated by this law, including the applicationof the tariff systems and its methodologies for the accessing and subsequent use of the oil pipelineand the product-pipelines respectively.63FOCUS ON ENERGYTHE RCEFBH - REGULATORY COMMISSION FOR ELECTRICITYIN THE FEDERATION BOSNIA AND HERZEGOVINAThe RCEFBH is headed by three commissioners and it regulates the production, distribution and supply ofelectric power in FBIH, including tariffs.The Regulatory Commission’s jurisdictions are:and electricity customers including power traders;

customers;eligible customers;facilities regarding the transmission of power,Public EnterprisesThere are three major public enterprises, each of which are essentially based on territorial principles andall three of them consist of both production companies (HPPs and coal power plants) and distribution andsupplying companies. Both distribution and supplying are operated by the same companies although in thefuture these functions may be separated. “Elektroprivreda RS” operate in the RS whilst in the FBIH both“Elektroprivreda BIH” and “Elektroprivreda HZHB” operate.64“Elektroprivreda RS” (full name “Mjesoviti Holding Elektroprivreda Republike Srpske”) operates in RS andits business is the production of electric power and its subsequent distribution, supply and trade. “ElektroprivredaRS”, as a mother company is 100% owned by the RS, but it is a majority holder in its subsidiariesthat are listed on the Banja Luka Stock Exchange. Five subsidiaries are production companies (operating theTPP Gacko, the TPP Ugljevik, HPPs on the Drina River, HPPs on Trebisnjica River and HPPs on Vrbas River)and five other subsidiaries are distribution and supply companies (Elektrokrajina, Elektrodoboj, Elektro Bijeljina,Elktrodistribucija pale and Elektro Hercegovina).FOCUS ON ENERGY“Elektroprivreda BIH” (“Javno Preduzece Elektroprivreda Bosne i Hercegovine”) operates in FBIH and itdeals with electricity generation, distribution, supply of the first (for non-qualified buyers) and second(for qualified buyers) order, electricity trade and mediation. Apart from the distribution business, its majorsubsidiaries operate HPPs on the Neretva River , as well as TPPs Tuzla and Kakanj as well as coal mines thathave been recently integrated into the company. Its majority shareholder is the Government of FBIH with a90% stake whilst 10% of the shareholding is owned by investment funds and smaller shareholders.“Elektroprivreda HZHB” (“Javno Preduzece Elektroprivreda Hrvatske Zajednice Herceg-Bosna”) operatesin FBIH and deals with electricity generation and its subsequent distribution, supply and trade. ElektroprivredaHZHB owns six HPP’s as well as distribution facilities. 90% of the shareholding belongs to FBIHand the remaining 10% is held by a collection of smaller shareholders.The company “Elektroprenos-Elekroprijenos a.d.” is jointly owned by the RS and the FBIH. Its role is to transmitall electric power produced in BIH to the distributors or to large consumers as well as to connect BIHsystem with those in neighbouring countries and to enable the export and import of the electric power.“BH Gas” operates in the FBIH, it supplies consumers with natural gas and it is the biggest gas carrier withinBosnia and Herzegovina.“Gas-Promet” operates in RS and it supplies consumers with natural gas.Private SectorThere are a number of companies registered for the production of electricity in RS and FBIH (e.g. “Eling”,“MIMS”, “Intrade-Energija”) as well as other companies registered for trade both nationally and internationally(e.g. “Energy Financing Team”, “Rudnap”).Energy Financing Team owns the coal mine “Stanari” and has been granted a concession for a coal powerplant in Stanari as well as the concession for the Hydro power plant Ulog on Neretva River.

“Sarajevo gas a.d” is a gas supplier in Eastern Sarajevo that is mostly owned by private shareholders. It islisted on the Banja Luka Stock Exchange. There are two refineries in the RS, the “Modrica” refinery thatproduces motor oils and derivatives and the “Brod” oil refinery, both of which are owned by the Russiancompany NefteGazInkor (a subsidiary of the Zarubezneft).There are around 800 petrol stations in thewhole of the BIH.REGULATORY FRAMEWORKElectric EnergyElectric energy activities are the production, distribution and trade of electricity. For each of these activitiescertain terms and conditions have to be fulfilled and relevant licenses and permits have to be obtained fromthe RCEFBH, RCERS and SERC. They are as follows:(“Energy Permit”), issued by RCEFBH or RCERS;“Energy Licenses”), issuedby RCEFBH or RCERS, which may be either an energy generation license or an energy distributionlicense;“Trading License”). These can be divided in several sub groups:(i) A Trading License for non-qualified buyers which is a first level license in the FBIH that is issued to asupplier that supplies only non-qualified buyers, or (ii) A Trading License for the supply of qualified buyerswhich is a second level license in the FBIH that is issued to any legal entity involved in the trade of electricity;(iii) A “domestic” Trading License, issued by the RCEFBH or RCERS which relates to trade within thearea of BH, and (iv) an “international” Trading License, that is issued by the SERC and that relates to thecross border trading of electricity.65In the event that an energy entity intends to provide more than one electric energy activity, it has toapply for each permit and license separately. A request for the issuance of a license has to be submittedto the competent regulator. As mentioned above, this must be accompanied with specified supportingdocuments and the regulator retains the right to ask for additional documents that it may deem asnecessary from time to time. Further information is available on www.reers.ba, www.ferk.ba, andon www.derk.ba.The RS Law on Electricity 19 provides that the trade of electricity in RS can only be performed by a companythat has been incorporated in RS and that such a company must have a domestic Trading License. The holderof a domestic Trading License is authorized to trade and supply electricity to qualified buyers and to otherenergy entities in BIH excluding non-qualified buyers (tariff consumers). Domestic Trading License’s can beissued for a period of 5 years or less and can be renewed. The authority issuing these licenses is the RCERS. Thedomestic trade and supply (except that of Non-Qualified Buyers) is based on the principles of free trade.FOCUS ON ENERGYThe trade of electricity in FBIH is regulated pursuant to the FBIH Law on Electricity. The main differencehere to the corresponding regulation regime in the RS is that in the FBIH, the authorized regulator for issuinglicenses for the trade of electricity on the domestic market is the RCEFBH and not the RCERS. A licenseis issued for a period of 5 years and can be renewed.GasIn the RS a license is needed to perform activities within the gas sector (e.g. gas transport, storage, distributionand sale). It is issued by the RCERS. It is issued for a period of 5 years and this can then be extendedfor a further five years. It is important to emphasize that a significant amount of documents needto be submitted with a request. The regulator retains the right to ask for other documents that it may19 The Law on Electricity (Official Gazette of the Republic of Srpska no. 8/08, 34/09, 92/09),

66FOCUS ON ENERGYdeem important apart of those specifically listed in the Rules on Licenses 20 . Further details are available at:www.reers.ba.The FBIH is mainly regulated by the Decree on the Organization and Regulation of the Gas Sector Economy21 (the “FBIH Decree”). All the provisions of the FBIH Decree are pursuant to the obligations assumedunder the contract on the establishment of the Energy Community, and the EU Directive regarding naturalgas. 22 Upon the enactment of the FBIH Law on Gas, the natural gas sector is also governed by the relevantprovisions of the FBIH Law on Concessions, the FBIH Law on Planning and Land Use, the FBIH CorporateLaw, various laws relating to energy, environment protection and all the supporting secondary regulations.The main regulator in this sector is the Ministry of Mining and Energy of the FBIH. Its functions will behanded over to the “FBIH Agency” once this has been established.OilWith regard to oil, a license is compulsory for the following activities in the RS: the production of oil derivatives,oil pipeline transport, the transportation of oil derivatives and the storage of oil/ oil derivatives.For the wholesale and retail trade of oil derivatives, oil/oil derivatives storage for personal use or oil/oilderivatives transportation by other transportation methods a license is not needed. A license is issued bythe RCERS for each activity separately for a period of 5 years and this can be extended. Unlike the RS, FBIHdoes not have bespoke legislation on oil and oil derivatives.20 The Rules on Licenses (Official Gazette of the RS no. 4/09)21 The Decree on the organization and regulation of gas sector economy (Official Gazette of the FBIH no. 83/07)22 The Directive 2003/55/EC of the European Parliament

NEWS ARTICLEREPUBLIKASRPSKA ISBUILDINGHYDROPOWERPLANTS ONTHE DRINA67Author: : Mirsad Bajtarević, SarajevoSource: Energetika.NET, Regional Energy News, www.energetika.net/seeRepublika Srpska will publish a callfor tender to select a strategic partnerfor construction of the hydropowerplants in the upper reach ofthe river Drina. The strategic partnerwill be selected in agreement withSerbia, announced the Minister ofIndustry, Energy and Mining of Republika Srpska, SlobodanPuhalac.The invitation for tender will be published in a transparentmanner and will be based on criteria that are stillbeing decided upon. However, the entire process stillhas to be passed by the National Assembly of RepublikaSrpska, said Puhalac at the regional ministerial conferenceon climate change and energy in Belgrade .“Oncethe strategic partner is selected, we will know who is goingto work on research, development, construction andexploitation,” says Puhalac.Puhalac said that hydropower plants Buk Bijela, Sutjeska,Foca and Paunci are planned to be constructed in the upperreach of the Drina river, and some facilities are plannedfor its central reach as well. He also expressed his expectationthat strategic partners for both areas will be selectedvery soon. With the current concept which does not envisagecooperation of Montenegro, the projected power ofthe upper reach of the Drina river is about 350 megawatts.In the first stage the capacity of hydropower plants in thecentral reach would be about 300 megawatts.“Drina has the potential of at least 1000 megawatts of theinstalled power and we want to realize this with a suitablepartner as soon as possible. We have to be awarethat the last facilities were built 20 years ago and thatat least 6 years will be necessary to construct the newones,” said Puhalac.According to the media from Bosnia and Herzegovina,Puhalac said that the energy potential represents a developmentalpossibility for the Republika Srpska, regardlessof the limitations and standards that can be expectedafter the Climate Change Conference in Copenhagenin December 2009.FOCUS ON ENERGY

MONTENEGROCrna Gora/Црна ГораMontenegro is a country located in South EasternEurope with a coast on the Adriatic Sea. It has apopulation of approx 650,000 people. The capitalof Montenegro is Podgorica. Montenegro officiallyapplied to join the EU on 15 December 2008.The energy sector of Montenegro is characterizedby its significant unused hydro potential and thepotential for the development of renewable energyprojects. The most recent reports emanating fromboth its regional and EU energy partners haveindicated a further increase activity in the sector inthe coming years.PODGORICA68FOCUS ON ENERGY

MONTENEGRIN ENERGY SECTOR – OVERVIEWElectric Energy SubsectorOVERVIEWThe production of electric power in Montenegro includes power plants with a total installed power of847 MW, out of which 76% of this power is produced by two hydro power plants (“HPP”) “Perućica”and “Piva”, and 24% from the thermal power plant (“TPP”) “Plevlja”. All Montenegrin power plants areoperated by the public enterprise “Elektroprivreda Crne Gore” (“EPCG”) which is the only producer ofelectrical power in Montenegro.The Montenegrin power system has approximately 322,420 customers. The electricity sector in Montenegrois highly dependent on imported electricity since domestic production is insufficient to providefor domestic consumption needs. Domestic generation is largely based on hydro electric power.The Montenegrin power transmission system consists of 1,257 km long power lines of 400, 220 and 110kV respectively. It is connected with neighbouring countries through 9 interconnecting lines. The entiretransmission system is operated by the public enterprise “Prenos a.d.”The Montenegrin distribution system consists of 18,556 km of distribution lines. A significant issue is thehigh losses of power that occur when electricity is transported through the distribution system (22.8%of the total power transported through the distribution system was lost in 2007). The distribution systemis operated by EPCG through its wholly owned subsidiaries which act as system operators for thedistribution grids in the regional centres. There are 16 regional centres in total.69Due to very low level of energy efficiency the Montenegro’s energy consumption is very high.The totalelectricity consumption in Montenegro in 2008 amounted to approximately 4,584 GW/h (4,646 GW/hin 2007).The Montenegrin infrastructure for the production of electricity is very outdated (The HPP plant atPerućica has been in operation since 1960, the HPP in Piva has been in operation since 1976 and the HPPplant located in Pljevlja has been operating since 1982) and is in desperate need of modernization.DEVELOPMENT PRIORITIESThe “Montenegrin Energy Development Strategy for 2025” was issued by the Government of Montenegro(the “Government”) in 2007 and it sets out projects to be realized in the electric energy subsector.FOCUS ON ENERGYThese include: Zlatica (238 MW in total); efficient projects.Coal SubsectorOVERVIEWCoal is the most significant energy resource in Montenegro. Coal reserves are located in both the Pljevljaand Berane basins. The coal reserves at the Pljevlja basin are estimated to be 184.5 million tons. At the

Berane basin, coal reserves are estimated to be 158 million tons. However, due to the lack of exploration,the total known reserves are only 18.5 million tons.DEVELOPMENT PRIORITIESThe Montenegrin Energy Development Strategy by 2025 issued by the Government in 2007, sets out thefollowing projects which should be realized in the coal subsector:(500 MW);Oil and GasMontenegro imports all its oil and gas requirements. According to certain exploration activities performedby the Montenegrin company “Jugopetrol a.d.” Kotor (its largest shareholder is the Greek company“Hellenic Petroleum”), there are indications that Montenegro may have oil and gas reserves in thebasin of the Adriatic Sea. Further exploration will be required to confirm if this is indeed the case.70FOCUS ON ENERGYMontenegro does not have a gas infrastructure nor does it have access to international gas sources.Montenegro’s access to international gas sources is entirely dependent on the future development ofthe gas infrastructure in neighbouring countries such as Serbia, Croatia, and Albania. Montenegro couldconnect to the planned Croatian gas pipeline running from Vrbovsko to Split which has the potentialfor an extension to Dubrovnik. The proposed construction of this extension to Dubrovnik (to whichMontenegro could connect) is still far from certain and it is still being examined by the relevant Croatianauthorities. Furthermore, if a proposed international pipeline connecting Italy and Greece is indeed constructed,this could then open the door for both Albania and Montenegro to connect to this network inthe future. However, it is estimated that the Albanian network would not be in a position to connect toany potential Montenegrin gas network for at least another decade.District Heating SystemAt the moment, there is no central heating system in Montenegro. The Montenegrin Energy DevelopmentStrategy proposes the installation of a district heating system in Pljevlja. In the city of Pljevljaand its surroundings there are significant numbers of decentralized coal boilers that are used for heatingwhich are operated by individual households or public utility companies. Upon the installation ofa central heating system in Pljevlja, the consumption of coal and its impact on the local environmentwould be reduced significantly. In particular, it is estimated that such a project would lead to savings ofapproximately 80 GWh per year.District heating systems are also designated for the following locations: Pljevlja, Nikšić, Bjelo Polje, Cetinjeand Berane under the Montenegrin Energy Development Strategy proposals. It also provides for theinstallation of a district heating system in Podgorica which would powered by the incineration of citywaste. This would be performed in a power plant constructed for that specific purpose. District heatingin Kolašin, Žabljak and Plužine may also be installed on the basis of waste combustion or from the useof biomass fuels.Renewable Energy SourcesHYDRO ENERGYMontenegro has significant potential when it comes to hydro electric power. This is true with regard tothe construction of both large and small HPP’s. There are plans provided by the Montenegrin Energy DevelopmentStrategy for the construction of several new large HPP’s each with a capacity ranging from 50MW to 600 MW along with several smaller HPP’s with energy capacities up to 10 MW. The total power

that could be achieved if the total hydro potential of Montenegro’s main water currents is exploited isestimated to be in the region of 9,846 GWh. The Montenegrin Energy Development Strategy statesthat Montenegro is exploiting less than 1,800 GWh which represents a capacity of 18% of its estimatedpotential. Nevertheless, it should be noted that the Tara River is located in the national park Durmitor,which is on the UNESCO’s World natural heritage list. Accordingly, the construction of HPP facilitieswould have to be performed in a manner that would not have an adverse impact on the Tara canyon orthe Tara basin.SOLAR ENERGYMontenegro has excellent solar energy potential. Montenegro is exposed to between 1,500 to 2,500hours of sunshine annually. It is particularly sunny at the coastal towns of Bar and Ulcinj.WIND ENERGYWind energy potential is relatively low in Montenegro. The projected wind energy capacity of Montenegrois estimated to be 400 MW including 100 MW in the most attractive regions of the country locatedat the coast and around elevated areas near Nikšić.BIOMASSForest land covers 42% of the Montenegrin territory. This equates to 6.750 km2. The available woodpotential is used mostly for household heating which amounts to 150,000 – 220,000 m3 annually. It isused by the public and commercial sector to a lesser extent. Except for traditional purposes, other usesof biomass fuels have not yet been established.71PROJECTS IN THE ENERGY SECTORHydro Energy ProjectsThe most significant source of potential energy in Montenegro is hydro electric power. Therefore, thissector is the focus of plans for the development of the energy sector in Montenegro.CONCESSION FOR CONSTRUCTION OF HPPS ON THE RIVER MORAČAThe Montenegrin Government plans to give concessions for the construction of 4 HPPs in Andrijevo,Raslovići, Milunovići and Zlatica each of which are located on the river Morača. According to the MontenegrinAction Plan for the Implementation of Energy Development Strategy, the total installed powerof these HPPs should amount 238 MW and their average annual production of electricity should be 700GWh. The estimated timeframe for the construction of all four of the HPPs on the River Morača is 6years and the Montenegrin Ministry of Economy (the “Ministry of Economy”) estimates that they willcost somewhere in the region of EUR 500 million to complete.FOCUS ON ENERGYThe “International Finance Corporation”, a member of the “World Bank Group” is providing consultancyservices in relation to this project. According to the Ministry of Economy, a public invitation for the prequalificationof interested bidders should be announced by the beginning of March this year, whilst theawarding of a concession agreement should be concluded by the end of 2010.THE HPP AT KOMARNICAThis power plant is planned to be constructed on the river Piva. The Austrian company “Pöyry Energy”is currently determining whether or not the construction of this plant is feasible. The HPP should have acapacity of 168 MW and an annual production of 232 GWh. It is scheduled to be completed in six yearsand it is estimated that it will cost approximately EUR 177 million to complete.

72FOCUS ON ENERGYSMALLER HYDRO POWER PLANTS (UP TO 10 MW)In September 2009, the Montenegrin Ministry of the Economy announced a public tender for the prequalificationof bidders for concessions regarding the construction of small hydro power plants. Qualifiedbidders are obliged to submit their bids by the 25 March this year. According to the Ministry ofEconomy, the signing of the concession agreements is expected to occur between June and Septemberof 2010. The total value of the investment required is estimated to be somewhere in the region of EUR60 million.Further similar concession procedures are expected in the second half of this year and they will be announcedby the Ministry of Economy.Coal and TPP ProjectsMAOČEThe Government has started the concession procedure for the mining of coal in the Maoče basin. Thesuccessful bidder will be required to construct a TPP at that same location. It is planned that any suchTPP will have an estimated power capacity of 500 MW. The deadline for the submission of applicationsfor the pre-qualification tender is 10 May 2010.According to the Ministry of Economy, the estimated value of the initial investment required to constructthe power plant will be somewhere in the region of EUR 743 million and the investment required

to open and commence the operation of the new coal mine will cost approximately of EUR 530 millionto get it up and running.Wind EnergyMOŽURA I KRNOVOThe Government has announced a public tender for the submission of bids for the construction of windfarms and the lease of state owned land in Možura which is located in the municipality of Ulcinj and inKrnovo which is located in the Municipality of Nikšić.It is estimated that the wind farms in the Možura region will generate up to 46 MW. The wind farm inKrnovo is projected to generate up to 50 MW. Land for the construction of these will be leased to successfulbidders by the state of Montenegro for a period of 20 years. The deadline for the submission ofbids was 24 February 2010.Agreement between Montenegro and ItalyThe Ministry of Economy and the Italian Ministry of Economic Development have signed a memorandumof understanding with regard to the development of the energy sector in both their respectivecountries. The memorandum will serve as the basis for the cooperation between the two in the field ofelectricity, natural gas and oil. There will be a particular focus on the development of electricity transmissioncapacities, renewable sources of energy and the improvement of energy efficiency.73The memorandum establishes a “Joint Commission” which is composed of both Montenegrin and Italianrepresentatives and this will help promote the implementation of the aims of the memorandum.This memorandum is especially relevant regarding the proposed construction of an electricity cableinterconnection between Italy and Montenegro which involves the construction of a cable across theAdriatic Sea. This commenced in 2007 when the Montenegrin EPCG and “Terna - Rete Elettrica NazionaleSpA” (“TERNA”), a major Italian energy transmission grid operator, entered into an agreement onthe preparation of a feasibility study. Pursuant to Ministry of Economy, the value of the investment hasbeen estimated to be in the region of EUR 600 million which is to be invested by TERNA. Apart from theItalian investment, “Prenos a.d.”, company which is currently operating the Montenegrin transmissiongrid, undertook to invest EUR 90 million for the further development and modernization of the Montenegrintransmission grid. According to the Ministry of Economy, It is expected that the project will becompleted by 2013.FOCUS ON ENERGYFuture ProjectsApart from the above mentioned projects, the Montenegrin Energy Development Strategy for 2025(the “Energy Strategy”) also proposes the following energy projects. To date, none of these have beencommenced. ityof 552 MW and an average annual production of 1,332 GWh. This system will consist of the HPP “Buk Bijela” and the HPP “Srbinje”. The combined potential capacityprojected by the Energy Strategy is estimated to be in the region of 552 MW and it is projectedthat it will have an average annual production of 1,350 GWh. However, due to environmental issuesthere is a possibility that this project may never get the green light. river Tara. It will have an estimated power capacity of 250 MW and an average annual productionof 533 GWh. -

tion of 4 plants. According to the Energy Strategy, The HPPs should have a total power capacitysomewhere in the region of 101 MW to 124 MW and an average annual production somewhere inthe region of 325 to 371 GWh.Milovci. According to Energy Strategy, these HPPs will have a combined power capacity in the regionof 75 MW and an average annual production of 222 GWh.panded.When the first block of the Pljevlja power plant was constructed, a significant part of theinfrastructure was designed with the construction of second block in mind. It is estimated by theEnergy Strategy that the new block could have a power capacity in the region of 225 MW.the Berane basin. Such a power plant could have a power capacity in the region of 125 MW with anestimated annual output of 550 GW.PARTICIPANTS IN THE ENERGY SECTORRegulatory BodiesTHE GOVERNMENT74FOCUS ON ENERGYThe Government defines the national energy policy of Montenegro. Under the newly proposed MontenegrinEnergy Law (the “Energy Law”), (which at the time this publication went to print was due to beadopted in March 2010) the Government will be in charge of the preparation of the above mentionedEnergy Strategy. It will also be charged with preparing an accompanying Action Plan for the Implementationof the Energy Strategy (the “Action Plan”). Apart from the planning documents that describe thenational energy policy in the energy sector as a whole, the Government will need to issue separate tenyear national programs for both the development and the utilization of the renewable energy sources(the “RES Program”), and a program for the development and utilization of the high-efficiency cogeneration(the “CHP Program”). The RES Program and the CHP Program should be issued within 12months of the new Energy Law coming into force.THE MINISTRY OF ECONOMYUnder the Energy Law, the Ministry of Economy will supervise the implementation of the national energypolicy as defined by the Government, and it will prepare annual reports to the Government onthe execution of the Energy Strategy, the Action Plan, the RES Program and the CHP Program. It willsupervise the activities of the participants in the energy sector, e.g. the producers of electricity, suppliers,traders, and their compliance with the applicable energy laws and regulations.The Ministry of Economy will also decide about permits for the construction of energy facilities throughthe issuance of energy permits (the “Energy Permits”) and will issue approvals for the exploration andthe measurements of the renewable energy sources’ (“RES”) capacities in locations where interestedinvestors plan to construct the facilities for the production of energy from RES.THE REGULATORY ENERGY AGENCY (THE “A G E N C Y ” )The Agency was established by the Energy Law from 2003 as the main regulatory body in the Montenegrinenergy sector. Under the new Energy Law, the powers of the Agency in the energy sector willinclude, amongst other things, the following: “Energy License”); efficiency cogeneration; for transportation, such as transmission and distribution grids;

operation and functioning of grids;tionthat they operate; 1 of energy; andoperators, traders and suppliers of energy.OTHER REGULATORY BODIESOther bodies in the energy sector include the Ministry for Environmental Protection and Spatial Planningwhich decides on the issuance of the permits and licenses that are necessary for the constructionof energy facilities and for the issuance of environmental protection permits and licenses. With regardto energy facilities that use or dispose of water, the Ministry of Agriculture and Water Management isin charge of the issuance of water management permits which define technical and other terms underwhich these facilities are allowed to use water.Public EnterprisesEPCGThe EPCG is the public enterprise for both the generation and the distribution of electric power. TheEPCG is currently the only producer of electric energy in Montenegro and it operates the entire nationalinfrastructure for the production of electricity including the TPP “Plevlja”, and the 2 hydropower plantsPerućica and Piva. The EPCG is also the operator of the national distribution grid and holds the licensesfor supply and trade of electric energy. In its capacity of the operator of the distribution grid, the EPCGissues the distribution grid code. The distribution grid code regulates the operation of the distributionsystem and the conditions for the connection and use of the grid (the “Grid Code”). Neverthelesswithin one year of the Energy law being adopted, the operator of distribution grid is to be a separatelegal entity, i.e. separated from the EPCG.In 2009 the Montenegrin Government sold 43.7% shares in EPCG to the Italian company “A2A S.p.A”.55% of the shareholding in EPCG is still held by the Montenegrin Government and the remaining of 1.3%is held by a variety of minority shareholders.PUBLIC ENTERPRISE “PRENOS A.D.” (“PRENOS”)Prenos operate the national transmission network and acts as the operator of the organized market ofthe electric energy. In its capacity as the operator of the national transmission grid, Prenos issues thetransmission Grid Code which governs the technical and other terms for the connection and use of theMontenegrin transmission grid. Additionally, through the capacity of market operator, i.e. entity responsiblefor operation and functioning of electricity market, Prenos issues market rules by which it regulatesthe operation and the functioning of electricity market. Nevertheless, the market operator as a separatelegal entity should be established by the Government. Once it is established, Prenos shall no longerhave the function of market operator, which was originally conferred to it by the Energy Law.75FOCUS ON ENERGYPrivate SectorENERGY FINANCING TEAM (HOLDINGS) APS (‘‘ENERGY FINANCING’’)Energy Financing is a Danish energy company with significant activities in the energy markets in a numberof ex-Yugoslav countries. It has investments in Bosnia and Herzegovina and it has planned investmentsin Serbia and Macedonia). Energy Financing holds a license for the supply of electricity. At present,it is the only fully private entity apart from EPCG to have obtained the status of a supplier of energy.1 Tariff buyers are buyers that purchase energy on basis of regulated prices. They do not have right to choose supplier but are being supplied by thepublic supplier. This category, generally, encompasses households

“RUDNIK UGLJA A.D.”, PLJEVLJA (“RUDNIK”)Rudnik is a company principally engaged in coal mining. Its main product is lignite which is used in TPP’sand by industrial plants. The company is also active in the coal exploration services and the wholesaleand retail sale of coal and other products. It is also involved in construction activities and in the supplyof construction materials.In 2009 the Italian company “A2A SpA” acquired 39.49% of the shareholding in Rudnik, whilst thesecond largest shareholder is the State of Montenegro with 31.11% a shareholding. Aco Đukanović, anindividual shareholder holds 10.10% of the shareholding, whilst the rest of the shareholding is held by avariety of minority shareholders.HELLENIC PETROLEUMThe Greek company Hellenic Petroleum holds a 54.31% shareholding in “Jugopetrol Kotor a.d.” (“Jugopetrol”).Jugopetrol is the largest importer, trader and retailer of oil products in Montenegro.MONTENEGRO BONUSThe company Montenegro Bonus is a 100% state owned company engaged in the storage, trade, supplyand distribution of oil and oil derivatives and liquefied petroleum gas.76FOCUS ON ENERGYMONTENEGRIN ENERGY POLICYThe long-term goals for the development of the Montenegrin energy sector are set in the Energy Strategy.The Energy Strategy is an elaborate planning document which provides an overview of the Montenegrinenergy sector, including the available energy resources, the state of the existing energy infrastructure,energy production and consumption statistics and information regarding the availability ofdevelopment opportunities. On the basis of the existing state of energy sector, the Energy Strategy setsout a list of development priorities which include:tionand renewable energy resources, in accordance with the obligations assumed under the EnergyCommunity Treaty;ergy,in accordance with standards set by the European Commission;opment,and in compliance with the applicable UNESCO declarations and the resolutions of theMontenegrin Parliament;sionand distribution of electric energy;On the basis of the Energy Strategy, in October, 2008, the Government issued the previously mentionedAction Plan. The Action Plan sets out a list of concrete projects that need to be carried in anattempt to implement the long-term goals set out in the Energy Strategy, the time frame for theimplementation of these projects, the institutional and regulatory framework needed and financialresources that will be required.

REGULATORY FRAMEWORKIntroduction – Energy LawThe regulatory framework of the Montenegrin energy sector will be defined by the Energy Law, which isdue to be adopted in March of this year. This will replace the previous energy law that had been in effectsince 2003. Even though at this point Montenegro does not have any infrastructure in the oil and gassector, the Energy Law will provide an elaborate set of rules that will regulate the storage and transportationof oil and gas, as well as rules governing the operation of the liquefied natural gas (”LNG”) facilitiesand the establishing of a regulatory framework to govern these energy activities once the relevantinfrastructure has been constructed.However, there are still further regulations be issued by the Government which should clarify the practicalimplementation of the various new solutions that are to be introduced by the Energy Law.Energy PricesThe Energy Law, (in accordance with the obligations that Montenegro assumed by signing the EnergyTreaty) sets out the agenda for the full liberalization of the energy prices by 2015. Currently the prices ofelectricity are either regulated or unregulated depending on whether the customer has the status of aqualified buyer of electricity or that of a tariff buyer.The tariff buyers buy electricity from the public supplier (the EPCG) under the tariff prices. A qualifiedbuyer may purchase electricity freely under the prices agreed with the supplier, but may elect to purchaseelectricity from the public supplier under the tariff prices as well. In principle all buyers of electricity,except for households have the status of a qualified buyer and may buy electricity independentlyunder the non-regulated prices. The tariff buyers buy electricity from the public supplier (the EPCG)under the tariff prices. A qualified buyer may elect to purchase electricity from the public supplier underthe tariff prices as well.The regulated prices of electricity are established by the producer of electricity in accordance with themethodology issued by the Agency and these prices must be approved by the Agency. In principle, theprice of electricity should be such as to cover the costs of production and include a margin on the investmentin the production of energy.The current system of energy prices will apply up to 2015, when at that point, the regulated prices shouldbe abolished, and all consumers, including the households, will obtain the status of the qualified buyersof energy.77FOCUS ON ENERGYRenewable EnergyNATIONAL STRATEGY FOR RENEWABLE ENERGY AND COGENERATIONThe Energy Law will introduce two strategy documents which should set out the national priorities in thedevelopment and promotion of the production of energy from renewable sources and cogeneration. Theseare the RES Program and the CHP Program; both are issued by the Government for a period of 10 years.The RES Program will set out the national goals for the utilization of RES, including, primarily, the minimumparticipation of the energy produced from RES in the overall final consumption of energy, includingelectric energy; heat/cooling energy and energy for transport (vehicles etc). The CHP Program should setout both the available and potential capacities for the development of high efficiency cogeneration, potentialbarriers for the development of these projects, incentives for development, the dynamics for theimplementation of cogeneration projects and the requisite financial resources required by an investor.The supervision over the implementation over the RES and the CHP Programs is to be assigned to theMinistry of Economy which will prepare a two-year report on implementation of the RES and CHP programsto the Government.

The first RES and CHP Program should be issued within one year after the coming into force of the newEnergy Law.INCENTIVES FOR THE RES AND CHP PROGRAMSThe Energy Law sets out three models of incentives which are to be: The Energy Law will set out the list of methods available to the Government to incentivize investmentsin the RES and CHP, as well as the basic elements of each particular method (presented in more detailbelow). However, the regulatory framework of incentives for RES and CHP set out in the Energy Law isincomplete. The general framework provided by the Energy Law should be supplemented by Governmentalregulations which should regulate in more detail, the incentive methods which will be providedunder the Energy Law. Such regulations should be issued within 6 months following the coming intoforce of the new Energy law.THE MINIMAL PARTICIPATION OF THE RES IN THE PRODUCTIONOF ENERGY (GREEN CERTIFICATES)78The incoming Energy Law sets out the obligations for producers of energy to undertake measures forthe increase of the quota of energy they have produced from the RES in their total amount of producedenergy. The mandatory minimal share of the RES in the total production should be established by theGovernment, in accordance with the RES Program.FOCUS ON ENERGYThe Energy Law sets out the system of certificates of origin for electricity produced from the RES or theCHP (“Green Certificates”). Suppliers will use these to prove the origin of the energy for the purpose offulfilling requirements imposed in relation to the participation of RES or CHP energy in the total amountof energy. These Green Certificates will confirm that certain quantities of energy are produced fromRES or the high-efficiency CHP (they will not be issued to producers of heat with facilities with a powercapacity below 1 MW).Green Certificates will be issued for a period of 12 months and are to be freely transferrable, i.e. they willbe transferrable by one supplier to the other supplier. Such a transfer will consequently reduce the shareof RES/CHP in the total production figures of the producer transferring the Green Certificate. Foreigngreen certificates or certificate of origin will be valid in Montenegro on the basis of reciprocity or pursuantto an existing international agreement.QUALIFIED PRODUCERS OF ENERGYProducers of energy from renewable sources of energy and high efficiency cogeneration, as definedby the relevant regulation that should be issued by the Ministry of Economy, will be able to apply forthe status of a Qualified Producer to the Agency (”Qualified Producer”). Other conditions whichthe interested applicant will need to fulfill to be granted the status of a Qualified Producer includethe following:measurement units which will measure the quantities of electricity produced in other technologicalprocesses. This way a record will exist of the amount of non RES energy received by that QualifiedProducer;energy system.

79The status of the Qualified Producer is to be granted by the Agency for a period of 12 years. Producers ofenergy having the status of Qualified Producer are to be entitled to privileged purchase prices for electricityand priority treatment with respect to accessing both the transmission grid and the distribution grid.Prices for the energy produced out of RES should be established in accordance with the tariff system forthe production of energy from RES and CHP which should be issued by the Government.A system of subsidized prices for RES is to be set up so that a supplier of energy will be required topurchase energy produced from RES (under the privileged prices), in proportion to the participation ofthe quantities of electric energy supplied to its customers in accordance with the methodology to beestablished by the Government’s regulation.FOCUS ON ENERGYThe final customers, on the other hand, will be required to pay a fee to cover the incentive for the investmentin the RES and CHP to the supplier through their electricity bills (which are to clearly state theamount of the fee, separately from the price of energy consumed).FEED-IN TARIFFSAt the time this Book went into print, the Montenegrin Government had prepared the draft proposaloutlining the Methodology for the Calculation of the Price of Electricity Produced from Renewable EnergySources (the “Draft Proposal”). The Draft Proposal aims at establishing the mandatory pricesunder which the Montenegrin suppliers of energy are to be required to purchase electricity from theQualified Producers.Under the Regulation, the proposed price for energy produced in wind plants is to be EUR 95.99 perMWh, for 2010. For energy produced in small HPPs (up to 10 MW) the price will depend on the annualproduction of energy and will range from EUR38 per MWh (for an annual production above 15 GW) toEUR 114.41 per MWh (for an annual production up to 0.5 GW). For electricity produced out of biomass,the proposed prices will depend on the type of biomass and are to be set at EUR 123.10 per MWh forwood, and EUR 137.06 per MWh for agricultural biomass.

NEWS ARTICLE15 COMPANIESINTERESTED INCONSTRUCTIONOF WIND POWERPLANTS INMONTENEGRO80Author: : Dragan Obradović, BelgradeSource: Energetika.NET, Regional Energy News, www.energetika.net/seeFOCUS ON ENERGYMinistry of Economy of Montenegrohas recently invited theinterested investors to submittheir bids for construction ofwind power plants and for thelease of the state-owned land inthe area of Mozura and Krnovo.A wind power plant with the potential installed powerof 46 MW is to be built at the location of Mozura (Municipalityof Ulcinj), while the wind power that is to beconstructed at the location of Krnovo (Municipality ofNiksic) will have the installed power of up to 50 MW.The land will be leased for the period of 20 years.Domestic and foreign companies, as well as the consortiawith experience in construction and operationof wind power plants, the average gross annual incomeof which exceeded 100 million euros in the period ofthe last three years, have the right to participate in thispublic tender. Tender documentation for individual locationscan be purchased for 3000 Euros.The invitation indicates that the bidder has to present abank guarantee in the amount of 100,000 euros or a proofof payment in order to prove that this amount has beentransferred to the bank account of the Ministry. The bidderwho will not receive the status of the first-ranked bidderis to be given back the bank guarantee money no laterthan 30 days from the day when the bid was opened.The deadline for submitting the bids is 24 February2010 by noon. Opening of the bids will take place on thesame day, two hours after the deadline for submissionexpires, in the premises of the Ministry of Economy.15 companies have expressed interest in constructionof wind power plants at the locations of Mozuraand Krnovo: Suzlon Wind Energy and Balkan. RenewableEnergy Development from Denmark; ABN WindEnergy, Lugano, Wpd Think Energy Gmbh&Co andAGSM from Italy; Koncar – Obnovljivi izvori from Croatia;NTE Energy Development from Norway; Eduinterfrom Spain; Energopromimport from Russia; OstwindGroup from Germany; Holrom Renewable Energy fromRomania; Terna Energy SA from Greece; Wind PowerCompany from Serbia; and EPS from the USA.The proof of interest has to contain information on financialand operational resources and a list and summary ofthe important projects and experiences in this particularfield. According to the Ministry of Economy, the submissionof the proofs of interest shall not limit the right ofthe other interested parties to participate in the tenderingprocess for construction of the wind power plants.

Karanovic & Nikolic is a leading commercial law firm with a regional focus on business in Serbia,Montenegro, Macedonia and Bosnia. With almost 100 fee earners it represents the first regionallaw firm emerging from the former Yugoslavia which provides a full service to clients investingin multiple markets.Our sector specific teams of lawyers bring together the best legal minds and experience inhandling the often complex legal issues surrounding investment in this exciting region.Our energy team serves leading European energy companies exploring these dynamic newmarkets today. Further details can be obtained from Milos Vuckovic, Partner atmilos.vuckvoic@karanovic-nikolic.com.OUR ENERGY TEAMMilos Vuckovicmilos.vuckovic@karanovic-nikolic.comBelgrade, SerbiaStevan Dimitrijevicstevan.dimitrijevic@karanovic-nikolic.comBanja Luka, BIHTanja Ungurantanja.unguran@karanovic-nikolic.comBelgrade, SerbiaLeonid Ristevleonid.ristev@karanovic-nikolic.comSkopje, MacedoniaKatarina Gudurickatarina.guduric@karanovic-nikolic.comBelgrade, SerbiaIvan Nonkovicivan.nonkovic@karanovic-nikolic.comPodgorica, MontenegroPRINTED ON RECYCLED PAPER

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